Debt Management Companies

A business can refer to themselves as a debt management company, but not all debt management companies are the same. There are usually two different types of companies that refer to themselves as debt management firms. One type of company will consolidate your unsecured debts and you will be repaying your balances in full with a reduction in interest rates. The other type of company will negotiate with your lenders to reduce the balances on your accounts.

The first type of debt management company is often referred to as a credit counseling organization or a debt consolidation company. Many lenders have becoming accepting of this type of debt repayment. You are still repaying your balances in full, but instead of paying up to 30% in interest most of interest rates are reduced to 10% or lower allowing a larger portion of your payment to go directly your principle balances on your credit cards.

All your fees are eliminated as long as you make a monthly payment as agreed. Most companies that handle this type of debt require that you set up an automatic withdrawal for your payment each month. Once this setup is complete, it is just a matter of making the money available for payment on your designated withdrawal date. This method should have you debt free in 3 to 5 years. This option for debt repayment will have little effect on your credit, because you are repaying your balances in full.

The second type of debt management organization is what is known as a debt settlement company. The laws have recent changed concerning these companies. These companies are being more highly regulated and the fees they are allowed to charge are being restricted and it is about time. Many of these companies were collected large sums of money from their clients before they pay any money at all to the lenders of their clients. I still don’t like the idea of using a debt settlement company and in most cases, neither will your lenders.

There is a time and place for debt settlement, but the negotiating required to settle a debt is something that you can do on your own without the help and cost of a debt settlement service. The way debt settlement works whether it is done by you or a third party organization is through a negotiation process with the lender where the total amount of the balance on the account is reduced. Most companies will reduce the amount by at least 30%, but I have seen times when the total balance on an account was reduced by as much as 80%.

Settling a debt may take some time just because lenders are overwhelmed at this time with people wanting to use this option for debt repayment. Contact your lender and let them know that you would like to settle your debt and let them know what you can pay to settle the debt in full. They will either accept your figure or counter with another number. It may be best to let the lender give you their required figure first. They may be willing to take a lot less to settle your debt than you would think. Being prepared to make the payment within a few days of the negotiation will give you your greatest leverage. Many lenders do have payment options for debt settlement, but it will be a short period of time…probably about 3 months.

If you are going to settle a debt, get all terms in writing. Even an email should work. Make sure you get a receipt for your payment and a release of debt document once the agreed payment is made. These documents should be kept in a safe place indefinitely. Things happen and there is a possibility that another company could try to collect on the forgiven portion of the debt. These documents will be the proof that you need to show that you have satisfied the debt in full.

There are a few things that you should know about debt settlement. It will ruin your credit because you are not paying your balance in full and you will be expected to pay income tax on the amount of the debt that is forgiven. With that being said this option can help you avoid bankruptcy. If you have $100, 000 in consumer and you can come with half that amount, over the next few years you can probably get out from underneath your debt. In many cases, you can be debt free through debt settlement in as little as a year and it should not take you longer than 3 years.

Opting to use a debt management company can get you out of debt and for some people it is almost a necessity, but it is important to make changes to how you manage and save money to avoid ever needing another debt relief plan. If you have ever had consumer debt, you know that you don’t ever want to have it again.