Let’s begin with a caveat. Zacchaeus Financial Counseling, Inc. does not engage in or endorse credit counseling. Credit counseling is heavily regulated, and for good reason. It has significant potential to damage your credit, which puts you in harm’s way financially, and often involves a third-party collecting money from you which is then paid to your creditors. If you want to ensure your creditors are paid in this type of situation, then you must have assurances that the organization is legitimate. There are times when credit counseling can help to improve your credit, however, other regulation already covers the length of time damaging items may remain on your credit. Therefore, if you embarked on your own, careful journey, you could conceivably arrive at the same or better place as a credit counselor could produce for you. This makes credit counseling something which no one should take lightly and always be very suspicious of potential fraud.

With that out of the way, let’s discuss the topic: What is a debt management plan (DMP)? The long and short of it is a DMP restructures the terms of your debt. The DMP arranges for a payment plan over a specific time period, negotiates interest rates with your creditors, may negotiate balances with your creditors, and often arranges for the accounts to be closed. The theory behind a DMP is two-fold.

First, if you need help managing debt, your credit has probably already been damaged. The DMP simply provides a mechanism for you to repay your debts and begin to rebuild your credit. Second, the DMP can offer relief from collections, high interest rates, and unmanageable payments.

This is something you can attempt to do on your own. However, your creditors will likely want to interview you and review your monthly income and expenses. Basically, they want to know that you can pay under the new repayment terms.

So wouldn’t it be easier to use a DMP? No. The Federal Trade Commission and U.S. Trustee Program, which is an arm of the U.S. Department of Justice, regulate credit counseling. Both departments of the federal government warn you not to work with a credit counseling agency that only wants to do a DMP without assisting you with budgeting. Creditors rely on these regulations in accepting a DMP proposal from a recognized credit counseling agency. You can imagine that harm which results from doing a DMP without the budgeting aspect. The federal government goes further and recommends that you only work with credit counseling agencies which provide ongoing budgeting help and guidance. The recommendation protects both you and the creditor.

In other words, to make the DMP successful, you must have a budget that works, use effective budgeting controls and make wise decisions with your money throughout the entire duration of the DMP. One reason for this is that being unable to successfully complete the DMP puts your credit at further risk of damage and quickly thrusts you right back into the position you were before signing up for the DMP – high interest, unmanageable payments, etc. Credit counseling agencies are doing you a disservice if they do not help you with budgeting.

Before you hire an organization to undertake a DMP for you, contact your state regulators to understand what the organization is required to provide and that the organization is properly licensed without a negative complaint/discipline history.

One final note is that credit counselors don’t work for free. There are fees associated with the DMP. Those fees may be paid by your creditors ... and they may not. As with any financial assistance, it should be provided regardless of the ability to pay.


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    Climbing the Money Tree


    R. Joseph Ritter, Jr. CFP® is a CERTIFIED FINANCIAL PLANNER(TM) and founder of Zacchaeus Financial Counseling, Inc., a non-profit organization providing financial planning services to low-income households and households experiencing financial strain.

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