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Are Debt Management Plans Legit?



Question: My wife and I have around $12,000 on probably a half-dozen credit cards. We’re paying the minimum on most of them and getting killed in interest rates. She wants us to sign up for a debt management plan. But it sounds too good to be true. 

I saw one place was advertising, “Reduce your total credit card payments by 30 to 50 percent.” How is that even possible? Don’t these people need to make money and pay bills themselves? How can they realistically offer that?

— Andrew in Vermont

Howard Dvorkin CPA answers…

In my two-plus decades as a financial counselor, I’ve been asked this question more times than I can count — and I’m also a CPA, so I can count pretty high.

The reason is simple: It does sound too good to be true!

But a debt management plan is a real and legitimate thing. You can read all about it in the report, Using a Debt Management Program, which tells you how a DMP works. However, it won’t tell you why they exist.

First, you need to know this: Credit card companies work with nonprofit agencies to offer these appealing terms. Why? Because it’s not in the best interest of credit card companies to lose customers who can’t ever climb out of debt. Also, it’s not a good look. Most companies care about their public image.

Credit card companies work directly with nonprofits who have excellent and longstanding track records of teaching people to stay out of debt once they dig themselves out with these favorable terms. While each situation is a little different, basically, the credit card companies agree to reduce your interest rates and freeze your late fees. Essentially, they’re looking to recover their expenses, not making any more money off you.

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So how do you enroll in a DMP? First, you speak to a certified credit counselor. Through credit counseling, you’ll learn if a DMP is right for you — because there are other options. Under the law, all credit counseling agencies must be nonprofit. Of course, that doesn’t guarantee they’re good.

I recommend looking for an agency with these qualities…

  • an A-plus rating with the Better Business Bureau
  • excellent customer reviews
  • a long track record — preferably measured in decades and not just years

To plug for a moment: If you ask us for a free debt analysis, we’ll introduce you to one of these reputable nonprofits. We partner with many such companies, and they vow to obey our Code of Ethics. However, if you don’t use us, try to find a credit counseling agency that meets the standards I mentioned above.

Andrew, I mentioned earlier that I get asked this very question all the time. I’m also asked variations, so you might want to check out, What Are The Pros and Cons Of Debt Consolidation? and Is Debt Consolidation Bad For My Credit?

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