Caution: Before You Enroll in a Debt Management Plan

Considerations Before Committing to Credit Counseling: A Cautionary Guide

In this article, I want to continue our credit counseling series on a debt management plan with some cautions or warnings about whether or not you should even go down that path. We talked about the suitability of credit counseling in the prior video, what credit counseling is, and how it works. It really boils down to being able to financially qualify your monthly income with all your bills, including the bills that are enrolled, like credit cards. Add them all up, and 2% of that total will be your monthly payment, so it is kind of easy to do the math. What is more subjective is whether you should commit to that plan. By that, I mean if you commit to that plan, you are going to be spending money, resources, and time committed to that path over about a 4 or 5-year period. So, if you are only marginally suited to a credit counseling service, you get started, you have $20,000 for the debt, 2% of that, and your new monthly payment is $400, and it is really thin for you.

Importance of Emergency Funds in Debt Management Plans

You are not saving money every month for emergencies because you won’t be using these credit cards anymore. They are closed as part of your enrollment in the program. You have to be prepared for life happening around you because when does it not? It does. Six months down the road, if you paid $400 a month, you paid $2400, and let’s say in month 7, something does occur, and you are not prepared for it. You miss a payment on your credit counseling plan, the debt management plan. You lose the benefits often of the interest rate conceptions that the creditors grant you. Your lower payments are no longer sufficient to meet the obligation, and the plan falls off the rails. So what happened? Well, you wasted 6 months on a solution that was not going to work for you and $2400. What would that $2400 have done as an alternative? Well, the average national cost of bankruptcy, including attorney’s fees and all current costs, is about $1800.

Bankruptcy vs. Debt Settlement: A Cost Comparison Analysis

If you are in coastal cities, that cost could range from $2210. In some Midwest and smaller municipalities, the cost may be lower. However, if you file for bankruptcy chapter 7, your debt will be gone, and you will get a fresh start. Everybody wants to avoid bankruptcy, and I understand that. But sometimes, it is the right decision to make. In this instance, it could fall off your credit counseling plan, and you would have covered your bankruptcy. Probably after 6 months or 3 months on the other side of it, you will already be recovering financially. That $2400 could have funded 2 settlements. Let’s say you had $20,000 worth of debt, and all of them were 5 accounts with $4,000 balances. $2400 might have settled 1 or 2 of your credit cards, and you are almost halfway to a solution that might have only lasted 2 years.

Considerations for Enrolling in Credit Counseling: Importance of Projections and Account Delinquency Levels

So it is important not just to do the math but to project. Credit counseling is generally best for someone who can meet that monthly payment, that newer lower monthly payment, but also somebody who has a dependable and consistent income. Another caution, and I will end the video with this, is that you will not want to enroll accounts that are past a certain level of delinquency. Advanced delinquency is typically charge-off or beyond. Charge-off, as used by credit card lenders, happens after about 180 days of consecutive non-payment, so for 6 months. If you have accounts that are charged off, they can no longer be re-aged. One of the benefits of credit counseling we talked about in the prior video. If you enroll them and, let’s say, it is with a debt buyer or something like that, and you fall off the plan, they might have reduced your interest rate with an agreement that everything is going to get charged up retroactively if you fall off the plan.

Be cautious when enrolling charged-off accounts in credit counseling services

There is absolutely very little benefit to enrolling charged-off credit card and other unsecured accounts in a credit counseling service. Given the fact that life happens, if you fall off, not only do you lose a benefit, but you probably won’t even end up paying down much of the debt, if any, when you enroll charged-off accounts. So be very careful about that. There are credit counseling agencies out there that will just throw Willy Nilly and rolled accounts in there. Be careful of who you actually work with in a credit counseling service because while many even do a lot of the same services, not all of them are created equal. We prefer Cambridge Credit Counseling, a national firm that does outstanding work. It publishes all their data, their success rates, so check them out.