—Article by Daniel A. Gelinas  

Consumers who are heavily burdened with debt and unable to resolve their financial troubles through budgeting or more traditional means basically are left with three alternatives; enrolling is a Debt Management Program, seeking relief via a Debt Reduction Settlement, or as a last resort, Filing for Bankruptcy.

This article was written to help consumers better understand the differences between a Debt Management Program and a Debt Reduction Settlement. It should help answer the question, "Which alternative is right for me?

The following provides detailed information regarding debt management programs, debt settlements and the credit counseling industry which we dare say you will not find elsewhere.

While the article is not all comprehensive, it was written to provide greater insight on an industry and an ever-changing process which, by its nature, is somewhat confusing to consumers.

It should also be noted that there are always variations and exceptions to most anything in life. The information is based on the author's knowledge and 18 year experience in the debt management and credit counseling industry.

We acknowledge that this article is somewhat lengthy. It should be pointed out, however, that whatever action is taken by the intended reader in an attempt to resolve their financial hardship, it will greatly impact their life in one way or the other. Spending the time to get all the facts is not only prudent, but a duty owed to oneself and especially to one's family. We strongly suggest you read the article in its entirety.

Making the right decision could set your free!

Debt Management Programs and Debt Consolidation

Debt Management Programs are typically provided through consumer credit counseling agencies, attorneys or financing institutions, each having their own agenda. The latter, attorneys and financing institutions, are for-profit companies, while most consumer credit counseling agencies are non-profit agencies.

Financing institutions typically manage debt through a debt consolidation loan whereas all debts are paid off with the proceeds of the loan. In effect, the debts are transferred from many creditors, to one creditor, and hopefully, as a result, provides the debtor with a lower overall monthly payment and reduced interest rate.

For some debtors this may prove effective, but for others the end result only compounds their financial problems. This is because a debt consolidation loan does not always reduce the debtor's monthly debt service sufficiently, and most detrimental, requires "security" in order to process the loan, typically with the debtor's home equity. Should the debtor default, he or she risk losing their home!

Using funds from a debt consolidation loan, second mortgage, home equity loan or line of credit to pay off unsecured debt should ONLY be done when it results in significant savings, and the effect of it resolves your financial hardship. You MUST be reasonably certain that you will never default on the obligation. Otherwise, it is not practical and financially sound to convert unsecured debt to secured debt and risk losing your home!

For more information see, Debt Consolidation — Do you know the facts?

Seeking Relief Through A Debt Reduction Settlement

A Debt Reduction Settlement is a process used by both debtors and creditors to settle a debt for less than what is owed. If negotiated properly on behalf of the debtor it can quickly and dramatically reduce the debtor's debt. Settlements range from 30% to 70% of the current debt, with the typical debt settled for 45 cents on the dollar. After paying Agency fees, a typical client realizes a savings of around 40% of their original debt placed in the program.

Debt Reduction Settlements are typically offered through third party debt negotiators, or attorneys as noted above. As this is an emerging industry, there are few true professionals providing these services. While more and more agencies are evolving, it is important to deal with one that is highly skilled in the art of debt negotiation, knowledgeable in debt collection, and who has in-house legal counsel, in order to obtain the most favorable settlement.

There are numerous factors to consider when negotiating a debt settlement. Some of these factors include, the type of debt, who the creditor is, the amount of debt, how old is the debt, the debtor's ability to pay the debt as agreed, the debtor's assets and liabilities, and so on.

Also of paramount importance is the debtor's ability to raise funds to settle their debts. You should be aware, however, that there are numerous methods used to raise these funds. The most important thing to understand here, is that debtors electing to resolve their hardship through a Debt Reduction Settlement do NOT need to have up-front cash to enroll in a program. Typically, funds used to settle debts are saved over a period of time—usually a 3 year period.

Enrolled in a Debt Settlement Program, clients open a savings account, in their own name, and then make deposits into the account on a regular basis. Oftentimes, to accomplish
this debtors elect to stop making payments on their unsecured accounts, opting to place whatever funds are available into the account. When enough money is saved, a debt reduction settlement is negotiated for one of the accounts. The strategy is to first settle
the account which is most troublesome and which may provide the greatest savings.
The process continues in this fashion until all debts have been settled in full.

What is of utmost importance in seeking a Debt Reduction Settlement is working through a highly experienced Debt Negotiation Agency that will not only negotiate the best settlement, but will also deal with your creditors effectively throughout the process. We cannot overstate the importance of this. Today, there are many companies claiming to be debt negotiators, but most have little experience, are ineffective in negotiating truly favorable settlements, and fail miserably in handling creditors and serving the needs of their clients. As a result, sadly these agencies are tarnishing the Debt Settlement industry.

The fact is, debt negotiation is a specialized field that requires many years of knowledge and expertise in order to negotiate the most favorable settlement and to manage the day
to day operation of handling creditors and clients. An agency must be well staffed with professionals knowledable in all areas of debt negotiation, debt management, banking, creditor and collection law, federal and state regulations, and must have specialized technology to handle ongoing creditor calls, to process negotiations and transactions, to handle payments, and to effectively communicate with staff members, clients and creditors.

Debt Management Through Consumer Credit Counseling

Consumer Credit Counseling agencies do not provide loans but rather restructures a consumer's debt using special channels made available only to non-profit consumer credit counseling agencies. Most major creditors have hardship programs in place which allows for reduced payments and lower interest, providing that the consumer enrolls in the Debt Management Program, thereby closing all, or most, of their unsecured accounts and placing them in the program. The consumer then makes a fixed monthly consolidated payment directly to the agency, which in turn, disburses the funds to each of the participating creditors according to a prescribed schedule and payment agreement.

Not all creditors offer forbearance, however, and although most do, the forbearance granted can vary dramatically with each creditor. In addition, each creditor has their own policy regarding a minimum acceptable payment. Failing to meet this minimum typically results
in no forbearance being granted.

Contrary to how it is often promoted, consumer credit counseling agencies typically do not negotiate with creditors. The truth is they merely set up a client's account according to each creditor's hardship policy. For example, if a debtor owes $1,000 to Superior Bank, and that bank's hardship policy requires a minimum payment of 2.2% of the outstanding balance, the agency must set up a payment of $22. If the debtor's regular minimum balance is, say, $40, then there is a reduction in payment. In some cases, however, there is little reduction, and sometimes, it actually results with an increased payment. On the other hand, if the debtor is past due on his regular payments and unable to catch up, the revised payment may reduce the debtor's obligations significantly. This is because enrollment in the program typically sets aside any past due amounts.

The revised payment is usually based on the outstanding balance at the time of enrollment. Currently, there are a few creditors who will accept a payment as low as 1% of the balance —and a few that demand a whopping 5%. The majority of creditors, however, require a payment from 1.5% to 3%, with 2% or 2.2% being most typical. For unknown creditors or those creditors without a hardship program in place, a payment proposal is mailed or
faxed by the agency based on industry standards.

It should also be noted that oftentimes creditors will not lower the payment or offer any forbearance on loan accounts. Therefore, the type of debt also plays a significant role.

In essence, how much a debtor's overall monthly payment can be reduced going through a consumer credit counseling agency depends entirely on who the creditors are, the type of debt and the amount owed to each creditor. In some cases the savings can be substantial, and in others it may be negligible. The only way to determine this is to analyze the debtor's financial profile.

You may be asking yourself, "Can I get a lower payment going through a different consumer credit counseling agency." It all depends on which agencies you apply with, their policies, and whether or not reduced interest and other benefits are of concern to you.

Remember, all major creditors have minimum payment requirements. In the above scenario Superior Bank required a minimum payment of 2.2%. But their policy may also stipulate that should that minimum be met, they will agree to lower their interest rate to 6%, to stop late fees and to re-age the account, thus bringing the account current. Failing to meet the minimum payment will result in none of these benefits being provided. And we have found that most creditors will NOT deviate from their policy.

A consumer credit counseling agency, therefore, could theoretically set up an account below each creditor's minimum payment in order to arrange for a very low payment. But because the payment is very low and there is no adjustment in the interest rate, the accounts will never liquidate. The client would not be served in their best interest.

Another factor depends on how the agency calculates the fixed monthly consolidated payment, the agency's minimum payment and the amount of their monthly service fee.
For example, some agencies will simply total the amount of debt being placed in the program and use a set percentage to calculate the fixed monthly consolidated payment.
So, if the total amount of debt being placed in the program is $10,000 and the agency's policy is to use a standard percentage rate of 3%, they would compute the fixed monthly consolidated payment as being $300 plus their monthly service fee.

Another approach, which is the method used when going through our agency, is to calculate a payment for each creditor based on each creditor's minimum payment requirement. The net result is the lowest acceptable payment possible which still provides for lower interest rates, stopped late fees and re-aging of accounts, whenever these benefits are provided.

The other consideration is the "agency's" minimum payment. If an account has a balance
of $300 and the creditor requires a payment of 2%, that would result in a $6 payment. Most agencies, however, do not want to cut checks for only $6 and may have a minimum of, say, $10 or $15.

In most cases, the second approach will result in the lowest payment because in using
the first approach the agency must use a percentage high enough to meet each creditor's minimum payment requirement in order to provide full benefits. So while a $10,000 debt balance may result in a computed payment of $300 using the first method, using the second approach, the calculated payment may only be $220. Those agencies using the
first approach typically do so simply because it involves less work than calculating each payment individually, given the number of applications they review.

Most consumer credit counseling agencies charge a monthly service fee. Even non-profit organizations require funds in order to conduct business and to provide services. Because some creditors make voluntary contributions to non-profit credit counseling agency, the monthly service fee is typically set relatively low in comparison to the services being provided. In most cases, the monthly service fee ranges from $20 to $50 and the method used to calculate the fee varies within agencies. Oftentimes it is based on the total amount of debt or number of accounts being placed in the program, or a combination of both.

It must be noted, however, that many creditors have reduced their voluntary contributions substantially and many creditors will not contribute at all. At the same time, creditors are taking a tougher stance and offering less forbearance to their customers who enroll in a Debt Management Program.

In addition, creditors are imposing strict guidelines and conditions for enrollment not only on the debtor, but also on consumer credit counseling agencies. New procedures are now required on how clients are enrolled, how proposals are made, how client payments are disbursed and how agencies are run. The effect of this has greatly increased the operating cost for ALL agencies, while at the same time reduced the amount of financial support previously provided by the creditors.

The Center For Debt Management™ pleads with creditors who may be reading this article
to review their hardship program and to take the appropriate steps to ensure that their customers who are enduring financial hardship are provided with an effective strategy and the relief needed to regain financial stability. Such action will enhance customer relations, help build life-long customers in which to market products and services, and in the long
run will prove beneficial to all concern.

Notice: There are consumer credit counseling agencies which are for-profit companies. Consumers should avoid these agencies as there is seldom, if ever, any benefits using them as opposed to going through a non-profit agency. In most cases, clients are provided with less forbearance and are charged higher services fees.

Attorneys who offer a debt management program typically act similar to a for-profit credit counseling agency. Some attorneys, however, may truly negotiate with creditors in an attempt to settle their client's debt. It should be noted that most attorneys who negotiate debts work on the debtor's behalf and usually charge an hourly rate. This rate is typically charged regardless whether a favorable settlement is reached or not. While this may
prove favorable to the client, in other instances it may prove costly to the debtor.

Which Alternative Is Right For You?

You may be asking, "Okay, so what is better for me, enrolling in a Debt Management Program, or seeking relief through a Debt Reduction Settlement?"   The answer is, it depends on many factors—and like everything else in life, there are always trade-offs,

The first step in deciding what avenue to take is to consider the type of debts you have
which you would like to resolve. As you will discover next, a Debt Management Program
is much more restrictive in the types of debts that are allowed in the program. Therefore, depending on your objectives and type of debt, the answer may be clear cut.

For some consumers a Debt Reduction Settlement may be their only alternative. For
other consumers it may be necessary to decide which is a better alternative, and hopefully in reading the following, a choice can be readily made. In some cases, seeking a Debt Reduction Settlement on some accounts and enrolling the other accounts in a Debt Management Program may prove more effective.

Below we list various types of debts as they apply to the Debt Management Program and Debt Settlements. In our next section we include a number of important facts that must be considered. In reviewing this material, you should be able to determine which alternative is most appropriate for your needs. Remember, however, we are only an email away and will be happy to assist you in arriving at the right decision!

The following types of debts cannot be placed in the Debt Management Program
nor settled through a Debt Reduction Settlement.

• Mortgages
• Auto Loans
• Most Secured Debts*
• Child Support
• Bounced Checks
• Fines Stemming from Legal Matters
• Taxes**
• Student Loans**

* Some secured debts may be settled when the "security interest" has diminished in value to the point where repossession is impractical.

** Our government does not negotiate. Taxes and government student loans are limited to "payment arrangements" and "offers in compromise."

The following types of debts cannot be placed in the Debt Management Program but
may be settled for less than what is owed through a Debt Reduction Settlement.

• Auto Leases
• Office Leases
• Equipment Leases
• Lease Defaults
• Repossession Deficiencies
• Liens
• Judgements
• Business Debts
• Business Credit Cards
• Debt Stemming From Lawsuits
• Rent Owed to Previous Landlords

The following types of unsecured debts can be placed in the Debt Management Program but typically is not granted any forbearance. They may, however, be settled for less than what is owed through a Debt Reduction Settlement.

• Installment Loans
• Signature Loans
• Billing Disputes
• Attorney Fees

The following types of unsecured debts can be placed in the Debt Management Program or be settled for less than what is owed through a Debt Reduction Settlement.

When placed in a Debt Management Program, however, it should be noted that while a lower payment may be arranged, interest relief may be granted, and late fees may be stopped, these types of accounts are not typically re-aged, and thus, may be reported as being past due and may eventually be charged-off to profit and loss.

• Accounts Payable in Full Within 30 Days
• Gas Charge Cards

The following types of unsecured debts can be placed in the Debt Management Program or be settled for less than what is owed through a Debt Reduction Settlement.

When placed in a Debt Management Program, however, it should be noted that while a lower payment may be arranged on credit card debt and bank loans, federal banking regulations require that three consecutive payments be paid through the agency before interest relief can be granted, late fees stopped or accounts re-aged. This regulation
does not apply to debts owed to non banks, although other creditors may have similar requirements in their hardship policy.

• Credit Card Debt
• Medical Bills
• Store Charges
• Service Contracts or Charges
• Past Due Utility Bills (from previous service providers)
• Subscriptions
• Memberships and Dues

Important Facts That Must Be Considered

In order to be accepted into a Debt Management Program, applicants must qualify for enrollment through a consumer credit counseling agency. This is typically accomplished by the applicant having to complete what is termed a Full Disclosure Budget. The agency then reviews the 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 a need for debt relief should 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 between $10,000 to $15,000.

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 50 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 Mangagment 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 the Debt Managment 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! Many Debt Settlement Agencies 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. Some creditors report accounts as being paid by debt management or credit counseling. For more details, read, The Affect of Enrollment in a Debt Management Program on your Credit Report

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, when working through our agency or associate, the settlement agreement with the creditor is worded such that the account be reported as "Settled-in-Full," "Paid-in-Full," or similar terms. Other debt settlement agencies may or may not evoke similar requirements.

As this topic may be of great concern to you, we suggest that you read the following article,
"Which Program Reflects Better on a Credit Report, Debt Management or Debt Settlement?"

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 altematives, which for most debtors overburdened with debt is to maintain the status quo and do nothing, or file for bankruptcy.

Regardless which program you elect to enroll in, it should 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!

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