Debt Management Services may actually make your Situation Worse

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Debt management services are often a last stop before bankruptcy.  On the surface, using one of these services can look like a pretty good deal.  They typically promise to help you set up a budget and create a lump-sum monthly payment that will handle all your debts, helping you get out of debt faster. 

Using one of these services isn't the same as taking out a debt consolidation loan, which means you don't have to qualify for one based on credit.  These services often claim to have great relationships with first party creditors that can allow them to lower your interest rates.  When your financial life is feeling overwhelming, reducing it all to a single monthly payment can sound like a godsend.  Unfortunately, there can be hidden costs and risks.

It's Not Free

Most debt management companies charge a fee.  The companies tend to hide their fees deep within the monthly payment, but that doesn't mean that you don't end up paying more on your bills than you would have without the company. 

You're also putting that monthly payment into an escrow account controlled by the debt management company.  Sometimes the company will wait a month to disburse funds.  These companies almost always have clauses in their contract which allow them to simply keep any money that's in escrow if you ever miss a payment, meaning you lose money that might very well have gone into paying the full balance on at least one of your bills.

Debt Management Does Not Protect You

If you did the math yourself you'd know that a $300 monthly payment on $26,000 worth of debt is a fishy prospect, especially after you factor in the debt manager's fees.  The debt management company will typically begin distributing payments in small amounts such as $10, $20, or $30.  While some creditors are content to receive these sorts of micropayments, others are not.  If any of your bills are in danger of generating a lawsuit you should be aware that these tiny payments won't keep the file from getting sent on.  Since debt managers tend to write "cease communication" letters to all of your creditors and instruct you not to contact your creditors either, you may not even realize that you're in trouble until it's too late.

In many cases, creditors won't even deal with debt management companies.  The debt management company isn't going to turn around and admit the problem to you.  They often simply stop paying anyone who rejects their offer.

Out of Sight, Out of Mind?

More people drop out of debt management than complete the program.  In many ways this is a result of the psychological tricks that debt management plays on you.  Let's say you reduce a monthly bill obligation of $1300 to just $300.  For a few months all goes well.  However, in your mind, you've just put $900 back into the monthly budget.  Chances are good that it won't be long before you spend your way into financial trouble once more. 

Once you're dropped from debt management the company lets all your creditors know.  The notation enters your file, making it that much harder for you to negotiate any kind of payment arrangement with your creditors, as you now appear far less trustworthy. Is it any wonder that bankruptcy is the most common result of entering a debt management program?

Debt management companies can look very attractive when your debt load grows too high. Be careful -do your homework and ask questions first.There can be hidden costs and risks that you need to know in order to make an informed decision.

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