Are Debt Management Plans Worth the Cost?

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The following post is by MPFJ staff writer Travis. Travis is a customer blogger for CareOne Debt Relief Services, and also appears weekly at Enemy of Debt. Travis candidly shares his personal journey to pay off $109,000 of credit card debt and the tips he’s learned along the way. As a father and husband, he provides a unique perspective on balancing debt, finances, and family.

My story is simple:  My wife and I accumulated $109,000 in credit card debt.  But we’re on our way to paying it off.
The first question I get asked is, “How in the world did you rack up that much debt?”
The answer really boils down to the fact that we consistently overspent day after day, week after week, month after month for 13 years.
From there, the story gets more complicated because the next question is, “How are you paying it off?”
In July of 2009, my wife and I enrolled in a debt management program (DMP).  A DMP is a program in which a debt relief provider negotiates with each of your creditors a lowered interest rate and a monthly payment that results in the debt being paid in full within 3-5 years.  In return, your lines of credit are closed, eliminating your ability to rack up additional credit card debt. We make one monthly payment to our debt relief provider, including a monthly service fee, and they disperse the right funds to each creditor.
In that description, the thing that people pick up on most is the fact that we pay a monthly service fee for our DMP.  Some don’t agree with paying a fee to an agency to help you get out of debt.  It feels like a scam to them.  This usually leads to some prodding with the intent of  convincing me that I overlooked a way I could have eliminated my debt without paying a monthly fee.  
The Statement:  “You can call your creditors and ask them to lower your interest rate.”
My Experience:  I called each of my creditors, and even after threatening that I would no longer be able to pay them each month if they didn’t help me, none of them agreed to lower my interest rates.
The Statement: “I heard that credit card companies have hardship programs that will lower your interest rate and your monthly payments – and they are free.”
My Experience:  While it is true that many credit card companies do in fact have such hardship programs, at the time I was investigating debt relief options in 2009, I did not know this and NONE of my creditors offered it to me.  Additionally, most of the hardship programs are only valid for a year.  Even if all 13 of my creditors would have agreed to put me in a one year hardship program, it would have been impossible to pay off $109K of debt in that length of time.  When my year ran out, I’d be seeking options once again.
The Statement: “Debt management programs don’t do anything that you couldn’t do on your own.”  The suggestion implied here is to cut expenses, increase income, or both. Learn to live below your means and pay down your debt.  No service fee needed.
My Experience:  This method certainly works. Except not everyone can do it on their own.  I compare it to someone that is desperately trying to get in shape and lose weight.  They try to do it on their own by promising to exercise regularly and eating healthy. For some, this works out perfectly, but some are met with failure because but it takes a level of discipline, motivation, and accountability that they just cannot find within themselves.  These people sometimes find success by enlisting the help of a personal trainer.  The trainer provides the structure needed to help the client achieve their goal.
As far as getting my finances back on track, I’m one of those people that needed a personal trainer.

My debt relief provider is my financial personal trainer.  Their progress tracking tools, and interacting with other customers in their online community provide me motivation.  The fact that my accounts are closed and I risk having my creditors rescind their agreement if I open new lines of credit, or miss a payment, provide discipline.  Even more importantly, my debt relief provider has resources available that have helped me learn how to track my expenses, budget, and for the first time in our marriage live within our means.

How Much Did My DMP Reduce My Interest Rates?

Our debt management program also has an important advantage over attempting to eliminate debt our own by way of the reduction of interest rates.  Prior to enrolling in the DMP,  the interest rates on my lines of credit ranged from 6% all the way up to 29.99%.  After enrolling in the DMP, my interest rates now range from 1% to 13%.

How Much Does My DMP Cost?

Had I continued just paying the minimum payments, it would have taken over 30 years to pay off my credit card debt, and I would have paid about $156,000 in interest.  With the program, my debt will be paid off in 60 months, paying $38,000 in interest.  For my $50 a month service fee ($3000 over the life of the program), my DMP will save me about $118,000, and years of debt repayment.
If you’re in debt, it’s important to know that you have options.  A debt management program is just one of many choices available.  The best thing that someone struggling with debt can do is to fully educate themselves on all the options, including doing it on your own, debt settlement or even bankruptcy.  Knowledge will enable you to make an educated decision.  A debt management program isn’t the right choice for everyone.
It was, however, the right choice for me.

How about you all? Do you think Debt Management Programs/Plans are worth the cost? Have you ever participated in one yourself, or know anyone that has?

    ***Photo courtesy of photostock / FreeDigitalPhotos.net

    Comments

    1. I think the monthly fee is MORE than well worth it. The one for our plan is $35, and that doesn't come close to what we'd be paying extra in interest if our plan hadn't gotten our interest rates reduced to where they are now (our highest right now is 9% for a card that started out with $28,000 on it at 24.99%). Great answers to those questions! If anyone is on the fence about a debt management plan, seriously, the fee is nothing compared to the security you get from working with a group and knowing that your debt is going down, and your rates won't spike next month or next year.

      • Thanks for sharing Mike! Had you tried to get your interest rate reduced by yourself being entering the DMP?
        My recent post Are Debt Management Plans Worth the Cost?

      • That's a great point, Mike – after an interest rate and payment amount are set in the DMP, it is good for the duration of the DMP (unless of course you violate the terms by not making a payment). You don't have to worry about getting a letter in the mail saying your interest rate is being hiked, or that they're changing their minimum payment policy. Thanks so much for sharing your experience and opinion, Mike!
        My recent post I Love You Like a Blogger Roundup – 12/14

    2. I have to admit that I'm one of the people that have been somewhat skeptical about DMP's in the past in that I've read that what they offer can be done by people on their own. However, this post gives a great perspective! It really does seem like the value the DMP provides to you is totally worth the cost.

      Because of this, I'm thinking that DMP's may be best suited for folks that have large amounts of debt. But, if they have small to medium amounts (say $2000-$20000), they may be better off just managing things on their own (if they feel they have the personal discipline to stick to it alone). What are your thoughts on that hypothesis?

      I imagine that it's also VERY important to find the right DMP, i.e. one that is going to be ethical and really wants to help people get out of debt instead of just making tons of money off the backs of their customers.
      My recent post Are Debt Management Plans Worth the Cost?

      • The amount of debt certainly plays into whether a DMP is the right choice. A person does have to demonstrate a need for debt relief – if someone makes $100,000 a year but has $2000 in debt they likely would not qualify to use a DMP because the numbers would show that they could handle the debt on their own.

        Beyond that, though, I think it goes even deeper than just the amount of debt, Jacob – I think the reason for debt also needs to be factored in. In our case, our finances were a complete and utter mess. Getting help in being able to eliminate our debt is one thing, but we also needed help in learning how to properly handle our finances through tracking expenses, budgeting, improving communication, etc. Our debt relief provider supplied all that to help ensure that we would never end up back in debt again.

        Finally, a person has to consider that their lines of credit enrolled in the program will be closed and no longer usable. Securing new lines of credit may be more difficult while enrolled in the program as well. In my case, those facts work to my benefit as there's no way I need any more access to credit. However, there are cases where continuing access to lines of credit are necessary. If that's the case, a DMP may not be the right choice.

    3. Also – I was curious about people's opinion on something else. In some books I've read, I've heard that the government offers some credit counseling/DMP programs (http://www.nfcc.org/creditcounseling/counseling_02.cfm)” target=”_blank”> ” target=”_blank”>(http://www.nfcc.org/creditcounseling/counseling_02.cfm).

      Is that true? Just curious to hear if anyone has looked in to these.

      Thanks!
      My recent post Are Debt Management Plans Worth the Cost?

    4. John S @ Frugal Rules says:

      I had a really good experience with a DMP. They only charged $2/month for the service and got 3 of my 4 cards knocked down to 0% and the other was under 5%. It allowed me to get my debt paid off very easily and got me started down the track of budgeting. It was the best thing I could've done.
      My recent post Frugal Friday: Posts That Ruled This Week, Where Did the Week Go Edition

      • I didn't know you were a DMP graduate, John – great to know another blogger that has gone through a similar experience – I'm very glad to hear your experience was positive as well!

    5. crossfitrook says:

      Travis, Thank you for sharing your story. I hope it results in other people recognizing the true cause of their credit card debt and seek assistance.

    6. I'm also in a DMP (as Travis knows) in canada- I don't know about CareOne but the agency we're using is a not-for-profit agency of our total monthly payment to them is 40.00. The service fee covers everything. $40 is menial compared to the sanity it has restored in my house. There needs to be more clarification about FOR-profit and NOT for profit agencies. I should also add that they have totally eliminated my interest….i now pay 0% interest on 25k worth of credit cards and loans. Totally worth it. I could not include my co-signed LOC;s from school (which sit at a nice 4% right now) or my government issued student loans which are also less than 5%. I love it.

      • Hi Catherine! the amount that CareOne charges is based upon the amount owed with $50 per month being the maximum (I pay the maximum). It sounds like you are having a positive experience thus far with your DMP as well. It's funny that you should mention needing clarification in regards to for-profit and not for profit agencies…..it's almost like someone should write a post on such a thing…..(foreshadowing). LOL.

    7. I know eh?! There's so much confusion around it. I've sort of started a post in draft but never finished it…

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