Downsides to Debt Management Programs

Debt can be both confusing and scary, and while there are many people and organizations that will do their best to help, there are also some that see vulnerable people as a chance to make money. For someone struggling with the daily stress of living with debt, a TV ad that promises to solve your debt problem quickly for a fraction of what you owe may seem like a no-brainer. However, frequently the companies that provide these services overpromise and even lie about what they will be able to achieve.

The model for many debt management companies is to negotiate lower payoffs on accounts. In order to get the creditors to agree to a lower payoff, the company stops paying them for several months. This allows them to save up a lump sum to offer the creditor, and it incentivizes the creditor to accept less. The idea is that after months of not paying your creditors will worry that you will never pay any money towards your debt and will instead accept a settlement significantly less than the balance owed from the management company.

The part of this story that they will often not mention, or will minimize in importance, is that while pursuing this solution to your debt you are legally still fully responsible for the money owed to your creditors. This has several potentially long-lasting impacts on your life. First, going from being up to date on the repayment of your debts to not paying means your credit will take a major hit. Second, as you still owe money, your creditors are within their rights to take action to get you to resume repayment, ranging from calling and sending letters all the way to filing a lawsuit against you. Additionally, many creditors will sell the debt to a debt buying company after not receiving payments for months, which will lead to more negative notations to your credit and possibly more aggressive tactics to try to get you to pay.

Finally, this settlement plan does not have a 100% success rate. If any of your creditors refuse the one-time payment from the management company and instead choose to continue to pursue you for the debt, you are still liable. In fact, you are now liable for not only the original debt, but also any late fee, fines, and interest accrued over the time dedicated to this plan all while your credit score has been significantly lowered.

None of this is to say that there are no trustworthy and honest debt management companies, or that debt management is not the right choice for some people. It is just important that you be fully informed about any company you work with and all options you have available to you. If you want more information about those options, The Massachusetts Debt Relief Foundation is here to answer questions.

1. https://www.halt.org/avoiding-debt-consolidation-scams-watch-out-for-these-signs-when-seeking-a-company
2. https://www.forbes.com/sites/lizfrazierpeck/2018/03/19/five-reasons-debt-relief-programs-cause-more-pain-than-relief/#6ba03b7440c9