A debt management program is a structured repayment program involving special terms on existing debt accounts. Major unsecured creditors participate in debt management programs by voluntarily providing debtors with preferred benefits that they would not normally be able to get on their own.
Debt management programs are provided by nonprofit credit counseling charities as well as for-profit debt management companies. While the quality of counseling varies tremendously between these different agencies, the debt management program itself has few differences.
One difference that is becoming more obvious is the ability for nonprofit agencies to be able to obtain better terms on certain accounts than a for-profit provider can. This is due to new discretionary procedures that allows nonprofit credit counseling organizations to request improved terms under special “call to action” guidelines. These improved terms are reserved for the most desperate cases as a means for helping them avoid a likely default. Certain creditors have blocked for-profit debt management companies from providing these same terms.
Debt management programs normally feature improved repayment terms on existing credit accounts. Eligible clients with a number of credit card accounts can normally expect to see marked reductions in their interest rates as well as a modest reduction in their payments. Payment reductions of 10-20% tend to be common, while reductions of 30-50% in payments are much less common. The reduction in interest rates provides for a greater portion of each payment to be applied towards principal, even though the overall payment tends to be lower. That allows for repayment to be completed within a 3-5 year period according to most plans.
In addition to the reductions in interest and minimum payments, clients can often gain relief from late and over-the-limit fees. Many creditors go so far as to re-age delinquent accounts, thereby restoring current status and relieving the debtor from having to catch up on arrears.
Prior to 1999, enrollment in a debt management program would reduce your credit scores. However, a study by Fair Isaac Corp. (provider of FICO credit scoring models) found that debt management program clients were no more likely to default than the general population. This penalty was removed from the credit scoring formulas as a result of the study.
Debt management programs can initially lower credit scores if the debtor is giving up accounts with substantial amounts of available credit. However, credit improvement is normally steady and substantial as on-time payments are posted and balances decrease.
Creditors may offset the cost of debt management programs by contributing voluntary fair share payments to nonprofit credit counseling organizations. For-profit debt management companies receive almost no fair share and therefore pass on these higher costs to their customers.
Long is a graduate of the University of North Carolina at Chapel Hill with a B.A. in Industrial Relations. He subsequently received his Certificate in Nonprofit Management from Duke University. His Certificate in Financial Planning was issued by Florida State University.
Long has achieved the Accredited Credit Counselor and Accredited Financial Counselor certifications through the Association for Financial Counseling, Planning and Education. Long originally achieved the Certified Credit Counselor designation through the National Institute for Financial Education.
In addition to years of nonprofit leadership, Long has been an innovator in the field of volunteer tax return preparation programs. He assists volunteer associations and nonprofit organizations who seek to integrate credit counseling and asset-building programs with free personal income tax preparation. His approach to using free credit reports as both an incentive and a screening tool for placement into asset-building programs has been shared with members of the National Community Tax Coalition, the EITC-Carolinas Initiative of MDC, Inc. and nonprofit groups across the Carolinas.
Long assists members of our armed forces in the Carolinas, Iowa, Rhode Island, Georgia and Germany with financial readiness. Please support our Soldiers, Marines, Airmen and Sailors!
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