Sense & Centsibility Blog

How Debt Management Plans Work vs. Debt Settlement Companies

Many people have never heard of a debt management plan (DMP), but a lot have heard of debt settlement companies. That's because debt settlement company ads are everywhere. They're all over the radio and TV promising that you'll have extremely low payments, you'll get rid of your debt, and you'll get a huge reduction in overall debt to pay off. What they DON'T tell you is the havoc that going through a debt settlement company will wreak on your credit report, not to mention the huge fees you typically have to pay.

How debt settlement companies and DMP differ

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If you enter into an agreement with a debt settlement company, they will hold onto payments until there is enough of a balance to propose a settlement to a creditor. In the meantime, your credit is getting torched because monthly payments are not being made. It appears to the credit reporting bureaus that you're not making any payments because your creditors really aren't receiving any sort of payment. Each missed payment lowers your score. And when a creditor doesn't receive payments for several consecutive months, that puts you in danger of getting a judgment on your credit report, which can lead to wage or bank account garnishments. Scary, right?

Also, a debt that is settled will show up on your credit report as settled - but not paid in full - for seven years.

LSS Financial Counseling is a member of the National Foundation for Credit Counseling (NFCC), and we help people set up DMPs every day.  We work with creditors to set up the DMP with a pre-arranged and typically reduced interest rate. If you set up a DMP, you would make payments to LSS, and we pay the borrowers' creditor/lender. The debt management plan actually helps IMPROVE your credit score with each monthly, on-time payment, versus debt settlement companies where monthly payments are NOT sent out. And just so you know, paying a debt in full is ALWAYS better for your credit than settling.

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So the next time you hear or see one of those ads promising huge debt reduction, keep in mind the risks and consequences involved and instead, turn to a non-profit agency like LSS. The Minnesota Attorney General lists us as a trusted resource for dealing with debt. Check out their "Money and Credit" web page for more information. Their website also has a ton more information about scams and how to protect yourself.

If you want to see if a DMP is right for you, call us today at 888.577.2227 or get all your support online. Financial counseling sessions are all free and confidential. Make a plan today to conquer your debt for good!