Debt Management Advantages and Disadvantages
The era of cheap and easy credit is well and truly over, and for millions of people the chickens are coming home to roost as debt problems start to kick in. Alongisde of this, there has been an explosion in the number of companies who promise that they can help you find a way out of your debt dilemna, by reducing your repayments dramatically and even wiping out most of your debt within a few years.
Is this really the case? To answer that, we first need to look at what these companies offer: what exactly is debt management?
The Basics of Debt Management
Debt management companies take over the administration of your debts, while charging you a fee for this. You now don't have to juggle your repayments to all your various creditors - just pay one monthly amount to the debt management company, and they will apportion it out between them.
The immediate benefit will be obvious to anyone experiencing debt problems: your stress levels can be significantly reduced when you're not juggling bills and payment demands, but this isn't all that debt management programs offer.
Negotiate Lower Debt Repayments and Charges
The management agency will also get in touch with the people you owe money to and try and negotiate lower payments that you can more easily cope with. They can also try and arrange for an interest freeze on your debt, so that more of your repayments go towards reducing the amount you owe rather than just throwing it away on interest.
It may also be possible to get previous late payments charges and the like cancelled and taken off what you owe depending on how willing your creditors are to negotiate. Most companies are happy to negotiate to some extent, especially when they realise that the alternative to a new lower repayment is no repayment at all because of bankruptcy, a point a good debt manager will make clear to them.
So, it would seem that debt management is a winner. Debts lowered, stress reduced, and the prospect of a future free of debt. Unfortunately, as with all things financial, thigs aren't that simple - there are also problems with debt management that you need to know about.
Credit Damage
For a start, renegotiating your repayments will by nature involve breaking the credit agreement you signed when you took out the finance in the first place. Whether or not you keep up with the new repayment plan, serious damage has already been done to your credit rating.
Of course, by this point you've probably missed a lot of payments and suffered credit rating damage already, so this might not be a major concern.
Fees
A more serious point is that while you might be able to get a debt management program from a charity, most on offer are from private businesses who charge a fee for taking you on.
You should always be wary of firms promising the earth - if it sounds too good to be true, it usually is. Make sure you check the fees of several agencies before you sign up for any of them as the amount they charge can vary wildly.
All in all, debt management can be a valid solution to serious debt problems, and should certainly be considered where bankruptcy is a possibility, but you need to know that your credit rating will be badly damaged and that you need to be careful who you sign up with if you want to avoid excessive fees.
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