Dear Gary,
Pam R. Rincon GA
Does this program pay off all of my current debt and then it’s transferred to your company or do you negotiate with my current creditors to reduce my interest rates and monthly payments? I really just want to figure out who I actually owe the debts to once I enroll. Is it you or my creditors?
Ask the Expert: Who Do I Owe on a Debt Management Program?
In this Ask the Expert, President Gary Herman explains how you still owe your debts to the original creditors even after you enroll in a debt management program to help you understand how the program works.
People ask that question all the time. They want to know, “Does your program pay off my bills and then I owe you the money?” And it’s a very common misconception, and I think part of it’s because people in our industry use the term “debt consolidation,” which is really only meant to suggest that you’re making one payment. How it works is actually the opposite. The consumer always owes the money to the original creditor that’s put on the program. The only thing a debt management program does is qualify the consumers for programs that their creditors make available for people who come through these programs to give them better interest rates, in most cases better payments. And they do it, in part, because the risk of you not being able to pay off bills is greatly reduced when you use a program like ours. The only question left to be seen for each individual consumer is, “Do you qualify for the program?” and that’s what we specialize in doing, in addition to helping you figure out what your other options are. But you still owe the money to the original creditors. Our program is completely voluntary – you can drop out at any time you want. All of the payments you’ve made still get credited to the original creditor, but now you just need to go back to paying them and your interest rates can and probably will go back up to where they were before.
Gary Herman, President of Consolidated Credit, answers
With a debt management program, you still owe your original creditors – or sometimes, to a third-party collector if the original creditor has already charged off the debt.
A debt management program allows you to simplify your monthly payments by consolidating all of those obligations into a single payment.
You make that payment to the credit counseling agency, but that doesn’t mean that you’re paying your debt off to the credit counseling agency. Instead, your agency payment is divided and sent to your creditors. So, the balances on your accounts go down every month even though you’re not making the payments directly to your creditors.
What happens in a debt management program?
A debt management program (DMP) is a form of consolidation. Nonprofit credit counseling agencies offer free debt evaluations to get an overview of your financial situation.
Counselors interview you to learn more about their income and lifestyle. The goal is determining how much of your monthly budget can be applied to paying down your debt.
The credit counseling agency must act in your best interest when determining whether a DMP is an affordable monthly one that works for you and your budget.
Debt management programs can reduce your total credit card payments by up to 50%. A DMP can lower the interest rates on your applied to your unsecured debts by 0% to 10%.
Is debt management the same as debt consolidation?
Technically, no. Pam’s question is common because the term debt consolidation is vague.
Debt consolidation means that your debts are rolled into a single monthly payment, but there are several ways of doing this.
One way is through a debt consolidation loan, where you take out a personal loan and use the funds you receive to pay off your credit cards and other debts.
With this type of consolidation, you owe the new lender who gave you the consolidation loan, and you don’t owe your original creditors anything. The same is true of the other do-it-yourself consolidation option, where you roll your high-interest, unsecured debts into one loan.
The goal is to simplify your repayment with a lower interest rate. However, lenders determine what interest rates they’ll offer on loans based on your credit score.
Borrowers with credit scores of 740 or higher will get the best interest rates, then those with 739 to 670. If your credit score is around 670 or lower, then a consolidation loan or do-it-yourself method like a balance transfer likely won’t help in your situation.
That’s when a debt management program is worth exploring.
How a debt management program works
The first step in a debt management program starts with a free consultation with a credit counseling agency.
The first debt analysis is a 30-minute to an hour phone call with a certified credit counselor. They’ll ask you a series of questions to evaluate your income, debts, and expenses.
The credit counseling agency works with you to arrange a monthly payment schedule that works for you. Then, they negotiate with your creditors to get them to accept that arranged schedule. At the same time, they also negotiate to reduce or eliminate the interest rates applied to your debts.
As a result, even though you pay each creditor less each month, you eliminate your debts faster because they’re not growing as much, with high-interest charges added each month. They also stop future penalties for late payments, so you aren’t wasting money on every payment you make on interest charges and fees.
Of course, if you drop out of the program, the creditor has the right to reset those high interest rates and apply new fees to your account if you struggle to keep up with your payments. Any payments you make while on the program are deducted from what you owe, but you’ll still be obligated to the original creditor to pay off the remaining balance.
This is why it’s in your best interest to see the program through to the end so you don’t have to worry.
If you’re struggling to get out of debt, we can help. Talk to a certified credit counselor to find a better way to repay what you owe, without taking on more financing.
