Are Debt Management Companies for Profit a Good Thing?

Consumers who are in over their heads in debt frequently are desperate and vulnerable. Debt management companies offer shelter from the storm in the form of reduced interest rates and payments, and the reestablishment of positive credit histories. Nonprofit debt management companies offer the safest form of mediation; however, for-profit enterprises have sprung up nationwide and often take advantage of those who are most at risk. The lesson: be wary of any for-profit debt management enterprise.

Promises, Promises

Debt management companies claim to work for the consumer, promote themselves as "nonprofit" or "not for profit," then proceed to charge hefty fees to their clients, often as high as 10 percent of their monthly payments. Alternatively, a company may offer to "settle" your debt, and then charge a fee based on the amount they "saved" you. Unfortunately, these high fees -- which can run into the thousands of dollars -- do nothing to decrease the debt load. In short, for-profit companies take advantage of desperate consumers who have a history of making ill-considered financial decisions.

Risks

In addition to the financial risks that a consumer takes when he agrees to a for-profit debt management plan, these companies often have long and notorious histories with the Better Business Bureau and state attorney generals. Before signing on with any debt management company, it's critical to check with the BBB and your state for background information. Many consumers have made payments into a "debt management plan," only to discover that the company was not making payments to creditors as promised. As a result, the consumer has more debt than before, has severely his damaged credit, and is out thousands of dollars.

Nonprofit Versus For-Profit

Any for-profit enterprise that claims to negotiate or settle debts more effectively than a legitimate nonprofit is selling something. Legitimate nonprofit organizations work closely with creditors, and although they don't "work" for them, they do accept donations. Creditors would much rather have the balance paid in full at reduced interest rates or settled, than have the debt go to collections or possibly to bankruptcy. Payments are made monthly with a nominal fee, usually no more than $20 per account. Consumers also receive one free hour of financial counseling, and have plenty of support and educational resources over the course of the repayment period to help them get back on track. For-profit enterprises rarely offer support or educational materials.

Nonprofit Resources

Consumers who are considering a debt management plan should take time to investigate the legitimacy of the organization. The first stop is the Better Business Bureau website, which has timely and thorough information and is available free of charge. The National Foundation for Credit Counseling is another terrific resource. The NFCC is the nation's longest-running consumer debt agency and is a gateway for legitimate management plans. Other consumer-friendly sites that provide debt management insights are financial guru Suze Orman's site and MSN Moneycentral. Do your homework. Free help is available.