Written By: Jennifer Lear
Recognizing when there are other professionals who might be in a better position to help our clients may be one of the best ways to help them. Clients fall into many categories—some can be helped by a financial counselor, some may be assisted by a referral to an attorney, some need marriage and family therapists or clergy, while others can benefit from a referral to a credit counselor for a debt management plan (DMP).
One of the unique functions that a credit counseling agency can provide is setting up a debt management plan for its clients. A debt management plan is a voluntary agreement between a consumer and the credit counseling agency whereby the consumer deposits funds to the agency and the agency then pays creditors on behalf of that consumer.
When making a referral, practitioners need to explain to a client that a debt management plan is very different from a debt settlement. Todd Christensen, author and director of education for the National Financial Education Center at Debt Reduction Services Inc, a national nonprofit credit counseling agency, noted that there is much confusion about the industry. “A reputable nonprofit credit
counseling agency will focus on helping consumers establish a working budget and to pay off their debts at lower interest rates and reasonable monthly payments, not on negotiating principal balance settlements that will further damage their credit or possibly lead to judgments and wage garnishments.”
According to Christensen, debtors who make the best candidates for a DMP have certain characteristics. “They have steady income, a significant amount of credit card and unsecured debt, and high interest rates,” he said. Arrearages on secured debts and secured debts themselves cannot be put into a debt management plan because it is prohibited by both federal and state legislation in most states.
Christensen explained that the focus is on renegotiating terms, including reducing the monthly payment amount and interest rate, but principal balances cannot be renegotiated and still must be paid in full. Most creditors have set terms that they typically use, and fees range from $20 to $50 per month (administrative fees for operational costs of debt management agencies). Fees are regulated by each state, and the fee cannot exceed $50 per month in any state.
While a debtor is in a program, creditors will note their participation in a debt management program on their credit report. This tells other creditors that this individual is in a hardship program, and creditors should not extend new credit.
The impact on a debtor’s credit report can be significant and typically happens quickly. Christensen noted that most creditors will begin reporting a previously delinquent debt as “paid as agreed” after the debtor has made three months of payments to the DMP. When it comes to qualifying for a mortgage while debtors are in the midst of a DMP, they can still qualify. “Mortgage companies like to see a documentation of 12 months of on-time payments in order to qualify for a home loan, particularly for an FHA loan,” he said.
Thomas Nitzsche, media relations manager for ClearPoint Credit Counseling Solutions, said that they typically see upward movement in credit scores of its clients in DMPs. “Our average client sees an increase in their credit score of 61 points after the first 12 months, and in three years, the average increase was 106 points. Typically, plans are four or five years, but no longer than five years. On average, a DMP reduces credit card interest rates by half and total monthly payments by 20 percent, so this savings can also help the client remain current on other obligations or bring them current.”
Nitzsche explained that it’s best if a debtor is no more than three months behind or less on a debt and the debt has not yet gone to collections. “Once they have gone to collections, we usually do not get the same interest and payment concessions from the creditor. We can still put them on the program, send a proposal and a monthly payment, but we may never get a response to the proposal.” In some instances Nitzsche suggests that clients contact those creditors or collection agencies directly, particularly after they have been in a DMP for a few months and have more disposable income.
Nitzsche encourages debtors to bring their spouse when they come in for their appointments even if only one spouse needs a DMP. “It’s important that couples are on the same page when it comes to making any changes to the household budget that will inevitably occur to make the plan work.”
The psychological satiation of earning one’s way to success is unaccounted for too frequently.
The National Foundation for Credit Counseling (NFCC) and the Financial Counseling Association of America (FCAA) are the largest professional, nonprofit trade organizations that provide accreditation, governance, education, oversight, and best practices to their credit counseling members and member agencies.
Christensen and Nitzsche both recommended that debtors seeking to establish a DMP with a credit counseling agency secure the services of an agency that is a member of either NFCC or FCAA. Oversight is also provided by each state, several of which have enacted a version of the Uniform Debt-Management Services Act, promulgated in 2005.
Among other regulatory measures, agencies offering debt management plans are required to secure hefty bonds and insurance policies and can face enforcement by the State Attorneys General.
On the federal level, the Internal Revenue Service (IRS) regulates nonprofit credit counseling agencies. If an agency provides bankruptcy-related certificate services, it also is regulated by the United States Department of Justice (DOJ). If housing counseling is offered, it is likely regulated as well by the U.S. Department of Housing and Urban Development (HUD).
Heather Baker, AFC®, was the Branch Director of Consumer Credit Counseling in Butte, MT, before working as the State Area Director of Financial Literacy Education. Baker is a strong believer in the value of debt management agencies. “I believe the value of debt management plans and the entities providing those services are severely undervalued. The ethical principle of paying off a debt one has incurred encourages personal accountability. The psychological satiation of earning one’s way to success is unaccounted for too frequently,” she said.
For additional information, log on to www.ClearPointCCS.org, www. debtreductionservices.org, www.udmsa. org, www.NFCC.org, and www.FCAA.org.
Jennifer Lear, JD, AFC® works as a Personal Financial Counselor for Zeiders Enterprises Inc. providing comprehensive financial education and counseling to Service members and their families.