How Debt Management Provides Advice

The way a debt-management or credit-counseling company provides advice to its clients is an indication of whether its services are effective. Among other things, people who are seeking debt-management advice should note whether counselors offer a personalized financial plan to their clients, before they decide to work with a company.

Personalized Financial Plan

Credit and debt-counseling services should offer debt-management programs as an option amid other financial assistance. According to the U.S. Federal Trade Commission, counselors should help clients create a customized financial plan that addresses budget and spending problems to prevent future financial difficulties. The debt-management programs that counseling services offer usually require clients to make monthly payments to the counseling services. These are then distributed to the clients' creditors. The FTC warns consumers against signing on to such programs if a counselor doesn't take the time to thoroughly look over their financial situation. Counselors wouldn't know if clients could complete a debt-management program without first sizing up their debts, income and ability to make payments into the program.

Debt-Management Programs

Debt-management programs should be balanced. They should focus on helping consumers pay off creditors and leave enough money in people's budgets to pay for necessities and some entertainment. Otherwise, the program will be too stringent and participants won't complete it. Collection calls from creditors often stop after they find out a debtor plans to repay them through a debt-management service because creditors are usually satisfied to know a debtor is making an effort to repay them.

Credit Counselors

Credit counselors not only set up a repayment schedule for debt-management programs, they negotiate with creditors to reduce what clients owe. Their goal usually is to get creditors to waive late fees and reduce interest rates. Creditors benefit from agreeing to such deals because they often recover more of what a debtor owes through credit-counseling agencies than through debt-collection companies. Collection companies can keep as much as half of the money they recover for creditors. Debt-management plans can take several years to complete, so creditors have a better chance of recouping more of what is owed on customers' accounts through counseling agencies.

Considerations

The FTC has found that some companies that offer debt-management plans have defrauded their clients. The FTC recommends that consumers who participate in such plans check their bills to ensure they're being paid as agreed. Still, a 2004 Bankrate article, titled "Debt Help That Isn't," says there are reputable

nonprofit, credit-counseling agencies that charge low fees for debt-management programs and other financial services. Those agencies include members of the

Association of Independent Consumer Credit Counseling Agencies and the National Foundation of Credit Counseling. According to Bankrate, some of the member agencies have charged monthly service fees as low as $12 to clients who enroll in debt-management plans.