Reducing Debt Through Credit Counseling or a Debt Management Plan

Consumer spending is the rock of our economy, but too much of a good thing can lead to trouble — especially when we discover we’ve over-financed our fun. Or maybe we were in great shape until an accident, major illness, or job loss curtailed our ability to earn.

However it piles up, consumers swamped with red ink should know there are options to get their ship righted, to get their debt back under control. Two choices that offer smooth, stable futures are credit counseling and debt management plans.

Credit counseling vs. debt management isn’t exactly a false choice. Instead, it’s sort of like Batman vs. Superman: Despite their apparent differences, they were on the same side from the start, and everyone — especially those who grew up reading World’s Finest comics — knew they’d end up friends and allies.

What Is Credit Counseling?

Credit counseling — the savvy Batman in this sometimes-partnership — involves coaching by a professional who, by training, study, and experience, conveys insights that can get debt-plagued consumers back on track.

The initial goal of a credit counselor is to evaluate your financial situation. Are you in serious, even critical, trouble? Or do you simply need to get yourself better organized?

This analysis will involve a meeting, usually by phone (though you could come to their offices in person), in which you lay out, in detail, your household finances: information about what you owe, other expenses, possible balloon payments, your income, your assets — anything that has a bearing on your money health.

Be prepared, also, to describe your goals. Do you simply want to be debt-free by a certain date, or do you have additional plans — saving for a house, for youngsters’ college, for an expensive trip, for retirement, for all of the above?

Your counselor will take all of this into consideration before presenting his/her analysis and plan of action. The solutions can range from simply making and adhering to a budget to, in extreme cases, recommending bankruptcy.

What Solutions Does Credit Counseling Offer?

Usually, a credit counselor’s advice falls somewhere between the extremes, and can involve a combination of solutions, among them:

• Create a budget, or improve/refine the one you have. If your debt troubles are a result of simple mismanagement or disorganization, a proper budget may be all that is necessary to set you straight.
• Provide guidance about your options for debt consolidation: Enroll in a debt management program; apply for a personal loan; refinance your house, using some of your equity to pay off your consumer debt; take out a home-equity loan.
• Advise you about closing some or all of your credit card accounts, how to manage the ones you keep open (if any), and how those actions may affect your credit score.
• Recommend debt settlement, in which you, or your liaison, attempt(s) to convince creditors to accept a lump sum that is less than the balance owed.
• Counsel you about bankruptcy.

A nonprofit credit counseling session is free of charge, so you have nothing to lose by talking to a professional

Several of the more moderate solutions described above hinge on whether the client possesses the discipline to follow the coach’s instructions. A credit counselor can be Nick Saban rolled into Dabo Swinney wrapped in Bill Belichick, but if the client won’t stick to the program, he can’t beat Vanderbilt — er, Visa.

What Is a Debt Management Plan?

A debt management plan, or DMP, often is the best among options that emerge during a credit counseling session. Rather than tackle the counselor’s recommendations on your own — and who has the time or energy for that? — you surrender the whole caboodle to his/her debt management team.

DMP does not involve a loan, and does not require a certain credit score to qualify. A DMP also does not require the consumer to negotiate terms with his/her creditor.

DMPs — the Superman in our superhero partnership — are simple and straightforward, and, as part of your nonprofit credit counseling agency’s toolbox, are practically invincible. Once you are enrolled, the agency will contact your credit card companies to work out an affordable payment plan, often with lower interest rates.

Thereafter, you will make a single monthly payment that may be lower than the combined minimum payments required of you now. Creditors will be reassured knowing you have committed to a solid repayment plan.

Whatever you do, do NOT equate a debt management plan with debt settlement. Just because they both start with “debt,” they are not at all the same.

Debt settlement involves radical creditor brinksmanship that may not resolve your balances at all and will surely devastate your credit score.

Debt settlement in a nutshell: You stop paying your creditors, and instead feed an escrow savings account; after some months, the debt settlement company attempts to settle your debt for some fraction of what you owe, paid in a lump sum from your escrow account.

By contrast, the goal of a debt management plan is to get your creditors repaid, in full, under a date-certain time frame — usually three to five years. Stick to it, and you will emerge debt free and brandishing a credit score that’s the envy of your peer group.

Is Credit Counseling or a Debt Management Plan Right for You?

Credit counseling is a perfectly reasonable approach to getting consumer debt under control. The debtor who is proactive, resourceful, and disciplined can, by sticking hard by the credit counselor’s plan, regain control of his financial future.

If this sounds like you — you never hit the snooze button; you never skip a workout; your calendar is always current; you’re always on time; you honor the food pyramid — you’re an excellent candidate for do-it-yourself debt mastery, with just a little help from the credit counselor.

In fact, we’re not sure how you got into debt trouble in the first place.

If, on the other hand, you’re fed up with keeping track of payment dates, fluctuating interest rates, the risk of late-payment fees, and/or the temptation to spend relentlessly, a debt management plan operated through a nonprofit credit counseling agency might be just the thing.

If you worry that taking out a new, larger debt consolidation loan,  when you’ve zeroed out your credit cards, debt management could be your best bet.

Whichever is the winning course for you, begin the journey by consulting a nonprofit credit counselor. Get yourself a partner dedicated to your fiscal fitness. Whether you wind up doing it yourself or allied with a debt management team, you’ll be better off having made a fully informed choice.