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Debt Management Programs and Services

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Outstanding credit card balances comprise a huge problem for today's consumers. Consumer debt doubled between 1995 and 2005, and so have the number of existing agencies to help people pay off what they owe. Debt prevention and management services are a thriving business intended to relieve stress and pressure on those whose debt has spiraled out of control, and help get them back on the right track.

What are Debt Management Services?

Debt management programs are designed to help people who may be able to pay back their debt over time, but are having trouble getting a consolidation loan or who do not wish to pursue debt settlement. Debt management companies amass all of your credit cards, loans, and other unsecured debts and combine them into one monthly payment. The debt management service then pays each creditor, usually taking a nominal percentage in commission.

In order to settle up your accounts, a debt management service will contact all of your creditors to arrange lower interest rates and reduced charges whenever possible. Some services also offer credit counseling and other programs to help you achieve financial stability.

Types of Debt Management Services

Debt management is not the same as debt settlement or debt consolidation. It differs from debt settlement in that it does not change the amount of the debt owed - but instead restructures the existing debt payback schedule. Creditors may agree to lower interest rates on the debt to facilitate repayment. Debt settlement involves negotiating to pay back only a portion of a debt (rather than declaring bankruptcy and paying nothing), and debt consolidation loans allow you to combine several debts into one new loan at a lower interest rate. Both of these programs result in the creation of new payment terms. Debt management, on the other hand, enables you to pay back all or most of your existing debt without taking out a new loan, with a new intermediary helping you keep track of the payments.

Most debt management programs will offer credit counseling services, helping you create a new budget and spending plan to prevent you from sinking back into debt again. Others leave the budgeting process up to you. The common factor in all debt management services is that they receive one large monthly payment and break it down into smaller payments to disperse to each creditor or lender.

Advantages and Disadvantages

Debt management services are a practical way to simplify your finances for easier management of a large number of debts. They relieve you of some of the burden of by managing the payment and distribution of your credit card and loan payments.

Because it's critical that all payments are dispersed to creditors in a timely manner, it's wise to be very selective in choosing a debt management counselor. It's a good idea to compare the rates and services of various providers to ensure that you'll find the arrangement that best suits your situation. Some debt management programs may take a percentage of each payment, while others charge additional fees.

Generally, this service is reserved for unsecured debts, like credit cards and personal loans. Debt management is rarely used on secured debts like mortgages and car loans.

Debt management programs can have a negative impact on your credit. Any changes to your loans or credit card debts that are negotiated by a debt management company can potentially appear on your credit history, and may be looked on unfavorably by future lenders. These marks on your credit, however, are generally less significant than missed or late payments, and definitely less harmful than debt settlement or bankruptcy.