Credit Strategies

Debt Consolidation / Debt Management Plans

Here’s how it works:

You make a payment, based on your income, every two weeks until your debt is paid off.  If you’ve had an unexpected event and have less or no income, this won’t work for you because if you aren’t consistent in making those payments, they can add on late fees, higher interest rates and a longer term.

These programs can take months before they do anything at all – you have to first pay in enough for them to pay off any debt, so you could have done what they claim they will do.  And at the end, it goes on your credit report that you paid at a discount, which doesn’t go away for 7 years.

NOTE: This will close ALL your unsecured accounts – they often lie about this…

Key complaints include:

1) High or hidden fees: Consumers often complain about excessive fees (sometimes 15%-25% of the total debt) or fees that are not clearly disclosed upfront, which can reduce the amount of money actually going toward paying down debt.

2) Failure to pay creditors: These companies have been found failing to pay creditors on time or at all, and instead pocketing the consumer’s deposits. This leaves the consumer in a worse financial situation, with accumulated late fees and penalties.

3) Misrepresentation and scams: Many are disreputable and lie about their nonprofit status, guarantee results they cannot deliver, or use other deceptive tactics to attract customers. A major red flag is demanding upfront fees for services, which is illegal for for-profit debt settlement companies selling by phone.

4) Poor communication and customer service: Customers frequently report issues, such as being unable to reach their counselor, getting generic advice rather than personalized counseling, or not being informed about the status of negotiations with creditors.

5) Negative impact on credit scores: While legitimate DMPs generally claim to improve a credit score by the end of the process (whatever timeframe you agree to), the process always involves closing accounts, which can impact the score for many years. Consumers may also experience credit damage if the company’s actions (or inaction) lead to late payments or collection actions, which is reportedly quite often.

6) Creditors refusing to cooperate: Not all creditors agree to work with all debt management companies or offer concessions like reduced interest rates or waived fees, which can slow down or derail the plan entirely.

How a DMP (Debt Management Plan or Debt Consolidation) is reflected on your credit:

– No separate DMP entry: The plan itself isn’t a single entry on your credit report.

– They can add a “DMP,” “arrangement to pay,” or similar marker to the specific accounts included in the plan.

– If you miss payments while on the plan, those negative marks will remain on your file for six years.

NOTE: Even if you didn’t include all your unsecured accounts, they will all be closed once this hits your credit report.