Disadvantages of Debt Management Plans

As of 2010, 43 percent of Americans spend more money than they earn annually, according to MSN. In addition, nearly every household in America holds more than $8,000 in credit card debt alone. The average debt per family in America is more than $18,000, excluding mortgages and living expenses. With increasing debt, the number of people seeking the aid of credit counseling agencies and debt management plans has increased. Debt management plans do offer several advantages but consumers must know all the facts.

Very Few Reductions

Debt management plans offer a way to organize your finances and reduce your monthly payments. However, there is no guarantee of a reduction in your interest rate or your outstanding balance. If your credit counseling agency has promised a reduction in either, keep checking your credit card statements to see that this indeed happens. With reduced payments and no other reductions, many consumers end up simply taking far longer to pay off their debts.

Reduced Credit Scores

Participating in a debt management plan will not likely harm your credit score as long as you make timely payments according to the terms of the agreement. However, your credit report will reflect that your are in debt management for certain debts. As long as this remains on your credit report, obtaining additional credit could be difficult. You may have to wait until the debt is cleared and the record of debt management removed before being approved for further loans or credit cards.

Lack of Control

Although debt management plans vary from company to company, most offer very little control on the part of the participant. The company decides how much is paid to each creditor each month. It also decides the amount you should pay it. There is no flexibility on dates. If you miss payments to your debt management company, you could loose any reductions that might have been negotiated for you. If your income isn't stable, then a debt management plan could possibly do more harm than good.

Fees

Several debt management companies charge fees for their services even though they are nonprofit. In most cases, the fees are small and most companies will not refuse to provide their services if you are unable to pay the start-up fees. However, according to the Federal Trade Commission, consumers need to question the nature of the fees to protect themselves from fraud. The FTC recommends asking how the debt management company employees are paid. If employees are paid on a commission basis, then you might want to look elsewhere. Do not sign up with any debt management company that will not answer your questions or disclose the requested information.