Debt Management or Debt Settlement
Facts That Must Be Considered
... Continued From Previous Page
In order to be accepted into a Debt Management Program, applicants must qualify for enrollment through a Consumer Credit Counseling Service. The agency reviews the prospects budget to determine if there is a need for the program, and if so, what accounts should be placed in the program, the estimated amount of the fixed monthly consolidated payment, and whether the applicant has sufficient income to make consistent monthly payments. If there is no need for the program or if the applicant will not be able to make consistent monthly payments, the applicant should not be accepted in the program.
In contrast, a Debt Reduction Settlement is based primarily on the debtor's ability to raise the required funds to settle a debt, or any number of debts. Bear in mind, however, the system is not meant for abuse and today, a severe financial hardship must be established.
In order for a Debt Management Program to be cost effective, most agencies require a minimum amount of unsecured debt being placed in the program. While this amount can vary between agencies, most agencies requires a minimum of $2,500
Debt Settlement Agencies also require a minimum amount of debt to be settled. In our research, most every agency we found required a minimum of $10,000 of unsecured debt.
Most major creditors require that all unsecured accounts be closed and placed in the Debt Management Program. Exceptions are sometimes made for accounts required for business purposes, accounts with cosigner who are not included in the program, or accounts with minimal balances. Some of these creditors may conduct a research and upon discovery of accounts not included, they may withdraw any forbearance provided. There are no such requirements for debtors seeking a Debt Reduction Settlement.
Enrolled in a Debt Management Program, typically it takes 4 to 6 years for the average client to liquidate their debt. Debtor's seeking a Debt Reduction Settlement are often able to liquidate the same amount of debt in 1 to 3 years.
When enrolled in a Debt Management Program, to successfully complete the program clients are required to pay back the total amount of debt owed, plus accrued interest.
In seeking a Debt Reduction Settlement, the amount paid back will depend on the creditors and skill of the debt negotiator. When negotiated through a Debt Settlement Specialist, settlements typically range from 20% to 80% of the current debt, with the typical debt settled for less 45 cents on the dollar.
Our studies have shown that for debtors enrolling is a Debt Reduction Program, their cost is approximately half that of those debtors who enroll in a Debt Management Program. This is because debtors enrolled in the Debt Management Program are required to pay back the entire amount of the debt owed, plus accrued interest, albeit somewhat reduced, plus any other fees that may be accessed during the 4 to 6 years while in the program, including the agency's monthly service fees.
We estimate that it will cost debtors enrolled in a Debt Management Program about 130% of the debt originally placed in the program. A debtor with $30,000 of debt should expect to pay about $39.000. This, however, is considerable less than the debtor would pay if the debtor was not enrolled in the program and only made the creditor's minimum payments.
We estimate that it will cost debtors enrolled in a Debt Settlement Program about 65% of the debt originally placed in the program. This assumes debts are settled at about 45 cents on the dollar over a period of 2 to 3 years and that the debtor is accessed typical agency's fees. A debtor with $30,000 of debt placed in a Debt Settlement Program should expect to pay about $19.500, including all agency's fees.
Caution: Don't be fooled! Debt Settlement Agencies oftentimes misrepresent the cost, quoting low figures to reel you in, realizing that they and no other agency can make any guarantees in this business (as you will see in any contract). The fact is you will never know your actual cost until you enroll in the program and all debts have been settled. Our research shows that 65% is typical—but understand that your actual cost may be more or less.
When enrolled in a Debt Management Program, most creditors will re-age the account after making three consecutive payments as paid through the agency. Most creditors report accounts as being paid by debt management or credit counseling.
In seeking a Debt Reduction Settlement, during the process accounts will likely be reported whatever the current status happens to be. If the debtor is not current, the report will reflect this. If the debtor is current, it should also reflect this. In negotiating settlements, however, the settlement agreement with the creditor may be worded such that the account be reported as "Settled-in-Full," "Paid-in-Full," or similar terms. Some debt settlement agencies may or may not evoke similar requirements.
When enrolled in a Debt Management Program, creditors are sent a payment proposal, which may or may not be accepted. When applying through most agencies, because the payment amount is always based on the creditor's minimum payment (when such a policy is in place), proposals are almost always accepted. In addition, the proposal request that all future inquiries be directed to the agency. While most creditors comply with this request, some creditors continue to contact the debtor, especially during the initial stages.
In conclusion, we hope that this article helps you decide which alternative is right for you. Both programs can be very effective for those debtors that truly qualify. Neither program, however, is ideal and each state had there own rules and regulations. But, you must consider your other alternatives, which for most debtors burdened with debt is to maintain the status quo and do nothing, or file for bankruptcy.
Regardless which program you elect to enroll in, it may put an end to upsetting collection calls, provide an effective means in which to satisfy your unsecured debts and allow you to get a fresh start with your financial life. Whatever you choose, we wish you much success!
If you are in debt, we strongly suggest that you take pro active steps right now to get out of debt. We have established a special toll-free number for you to call for a FREE debt consultation with a certified debt counselor that can help place you in either a Debt Management Program or Debt Settlement Program, or if you prefer, simply answer all of your questions. There is absolutely no obligation for you to do anything. Call Right Now. 1800 DEBT.COM (that's 1800 332-8266)