Debt Management, Consolidation, & Settlement: The Fig Guide
Posted: July 9 2020
By: Daniela Bucay
Loans do not always go as planned. Occasionally, borrowers fall behind on payments, and this can lead to damaged credit, stress, and confusion.
Several types of businesses have sprung up, claiming to help people with outstanding debt who want to pay down that debt and move on with their lives. These include debt consolidation loans, debt management programs, debt settlement programs, credit repair law firms, and so on. Some businesses in these categories are more reputable than others, and many times, you may not even need to engage the services of these companies in order to address an outstanding debt.
- Debt settlement and debt management programs are NOT the same.
- Many financial non-profits offer credit counseling, which can be a great first option for people struggling to pay down debt.
- Before engaging the services of debt management programs or debt settlement programs, both of which are third parties, you should talk to your creditor first to see if you can resolve the debt directly with them
- If you choose a debt management program, make sure you understand all the terms and that you communicate with your creditors proactively.
- If you choose a debt settlement program, make sure you understand all the credit implications, costs, and terms.
- Debt management and debt settlement, as well as credit repair, are easy areas for scams to proliferate. Make sure you do your research before giving over sensitive information or paying any fees!
In this post, we'll discuss some solutions that claim to help people struggling with debt, including debt management programs and debt settlement. We'll break down what each solution entails, when you should use them, and what to look out for if you decide to use one of their services.
Talk to Your Creditor
You should always talk to your creditor first if you feel overwhelmed by your debt before looking to third parties to help you manage your debt. When you talk to your creditor, ask if they offer payment plans, settlements, debt forgiveness, or any other options to those struggling to pay. Their answers may surprise you; even if their answers are what you expect, it helps to know exactly what you're dealing with.
At Fig, for example, we can offer payment plans that can help you stay on track with the credit bureaus without overtaxing your budget. We can also figure out ways to get you back on track with the bureaus whenever possible, as well as direct you to area nonprofits that provide financial coaching.
If you have a lot of creditors and the prospect of reaching out to all of them and organizing the different plans gives you anxiety, we strongly encourage you to consider credit counseling!
Among the third-party options, we discuss credit counseling first, as we consider it the best place to start if you feel overwhelmed by outstanding debt. Many nonprofits, including some of our partners, offer credit counseling as part of their financial wellness centers.
Credit counseling is our recommended way to start because credit counselors can look at your whole financial situation and recommend strategies. They are also trained in matters of consumer credit, debt management, debt settlement, budgeting, and, if they're with a nonprofit, not in it to make money.
You should be able to get information about what kind of services a reputable credit counseling agency provides without giving out sensitive information. Beware of any credit counseling services that ask for money up front or sensitive information before giving you more insight into their practices, as this can usually signal a scam!
To find a trustworthy credit counseling option in your area, we recommend visiting this page put together by the U.S. Justice Department. You can also consult with local nonprofits, including the United Way in your area!
Debt Management Programs
Debt management programs are the next step up from credit counseling, and indeed, many of the nonprofit credit counselors can also get you started on a Debt Management Program (DMP). You should always consult with a credit counselor before entering into a DMP, as it is important to understand the length, term, and implications of the commitment.
In a DMP, you make monthly payments to the credit counseling organization itself. The organization then negotiates with your creditors to try to waive late fees, adjust your interest or balance, and make smaller monthly payments. Many DMPs last anywhere from 1-5 years, with the most common lasting 3-4 years.
A DMP has several advantages, including:
- One monthly payment that goes towards multiple outstanding debts
- Ease of budgeting, because it's one monthly payment with a fixed amount
- Reputable credit counseling organization negotiating on your behalf.
- No additional debt, since you're not taking out a debt consolidation loan or paying a for-profit debt settlement company.
If you do sign up for a DMP, you want to make absolutely sure that you have exhausted other options, can afford the monthly payment, trust your credit counselor, and are not liable for any additional fees. You also need to understand the credit reporting implications. In a DMP, since you will be paying off your debts on a monthly basis, this may help prevent your score from further damage, however, because it will take you longer to pay off your debt and you may pay less than the originally agreed-upon amount, those factors may negatively affect your score.
When in doubt, go through a nonprofit since they have so much regulation and are less likely to scam you. Also, don't be afraid to ask every question you might have about the effects of the DMP before you sign on. If it sounds too good to be true, it just might be!
Debt Settlement Companies
Take every precaution with third-party debt settlement companies. This should frankly serve as the last resort, after you have tried to manage (or settle) the debt directly with your creditor or sought help from nonprofit credit counseling organizations.
In a debt settlement program, a debt settlement company negotiates on your behalf with a creditor to accept a settlement on your debt, which means you would pay back a lower amount than what you owe. Although this sounds good, it can lead to trouble.
First of all, most debt settlement companies are for-profit. If you plan on going the settlement route, try to find a nonprofit that can help, otherwise using a debt settlement company means you're just paying money to try to pay off debt, i.e., money you already don't have, without a guarantee that the creditors will accept the settlement offers. Secondly, debt settlement programs can really hurt your credit because of how they work.
When you contract with a debt settlement company, they usually stop all payments to your creditor. This gives them some leverage over the creditor, but leaves you with late remarks or perhaps even delinquencies on your credit report. Although you make payments to the debt settlement company in a similar way as you do in a DMP, the company does not immediately use this to pay your debt down. Rather, they put it into an account and hold it there until the creditor has agreed to a settlement.
As you pay the debt settlement company, they try to negotiate with your creditor. Negotiation can take a while, and once again, you have no guarantee that the creditor will accept any of the settlement offers. If and when you do finally reach a settlement agreement, you usually still have to pay the settlement company, and you end up with a settled loan on your credit report, rather than a paid off loan. A settled loan hurts your score and your chances of future loans!
As the FTC explains, debt settlement carries many risks, including:
- Expensive fees
- Substantial damage to your credit
- No guarantee that settlement offer will be accepted
- Great potential for scams
We hope that this post shows the different options available to anyone overwhelmed by debt. Remember, first step is to talk to your creditor. After that, consider credit counseling, then either a debt management program or another debt consolidation approach, and only as a last resort should you consider paying a third party to help you reach a settlement.