When Should You Consider Using a Debt Management Company
A Credit Article Contributed by Mark Mcclelland
Using a Debt Management Company
A good debt management company can help you when you're overwhelmed with debt, plotting a new course that will get you back on track with your finances. Through the use of a process called debt consolidation, a debt management company will negotiate with your unsecured debt creditors, for example, your credit cards issuers, your medical bills, and personal loans, for better terms fro repayment of your debt. But these firms usually don't deal with secured debt, like your mortgage or your car loans, or with overdue utility bills or unpaid late taxes.
If you're having trouble in these areas, you should look into refinancing your mortgage or car loans. You'll have to work directly with your utility companies and the IRS for payment problems with those agencies.
The new terms a debt management company may be able to negotiate might include reduced interest rates, leading to reduced monthly payments, and waivers of late fees and other existing charges. But they most likely won't be able to reduce the amount of debt you owe, or eliminate your interest charges altogether.
And you shouldn't confuse the debt consolidation process used by a debt management company with a debt consolidation loan. Debt consolidation loans involve your taking out a new, albeit usually lower-interest loan, to pay off one or more higher-interest rate debts.
Debt consolidation can save you money and get collection agencies off your back. Plus, you make only one monthly payment to the debt-management firm, which pays your creditors.
Unfortunately you can't always escape damage to your credit record. Creditors may still report you to a credit bureau for late payments; however, this is not nearly as damaging to your credit report as bankruptcy.
When Should You Consider Using a Debt Management Company?
While most of us would turn to a debt management company for help when we're on the verge of defaulting on our credit card payments, or filing for bankruptcy, this shouldn't necessarily always be the case. You might consider employing the services of a debt management company before you actually reach a state of crisis. But how would you know when to start looking for a good company?
Look at your debt ratio - that is, the percentage of your after-tax income that goes to paying off your overall debt. And most financial experts agree that your debt ratio can be used as a good barometer of your overall financial health. A manageable debt ratio is approximately 40 percent. If your ratio climbs to over 50% the changes are fairly good that you could benefit from the services of a good debt management company.
This is especially the case if you've started missing payments of have been late paying them or some of your debts have gone to collection agencies. In addition to the debt consolidation process, a good debt management company can help you learn how to manage your money more effectively through credit counseling, budget workshops and the like.
Where Can You Find a Good Debt Management Company?
There are many, many, many debt management companies, both for-profit and non-profit, that offer their services over the Internet. But it pays to do your homework here. You're going to be with whichever company you select for a long time, so do your research carefully.
You might want to consider starting with firms that belong to the Association of Independent Consumer Credit Counseling Agencies and / or the National Foundation for Credit Counseling. Be sure to check the company's standing with the Better Business Bureau office where the company is actually located since it might not be local to you. Be sure to find out how, and how often the company is going to pay your creditors. And be sure to ask if the company keeps a reserve fund to use as your insurance in case you're unable to meet your monthly payment due to some temporary financial emergency.
