The Invasion of the Debt Management Programs


In terms of cost, certainty and benefit, bankruptcy is head and shoulders above ANY other type of debt management program or loan program, including the many that you hear or see advertised on television or radio.  Why?   Because first, you will not spend thousands of dollars just on fees and you will also not spend thousands of dollars on repayment plans that take four, five or six years to complete and..... this is very important..... these debt management programs offer no guarantee that your creditors will in some way agree to change their terms, or change then in any meaningful way.  


Almost all of these debt management programs in which your only contact is over the phone or by mail are, in my book, very shady!   One, they are highly profitable, yet say they are non-profit (!); two, they give you no-guarantees (ask them for one); and they are highly evasive about any specific terms they have worked out with your creditors (ask them to provide you, on paper, what specifically they have worked out with each of your creditors).


They generally collect four types of fees from you, sometimes noting them in small print, sometimes not noting them at all!   They call it a contribution, but their documents submitted to the Federal Trade Commission say otherwise (how do your think they pay for all those commercials).


Often what occurs in these so-called debt management programs is that you end up with a confusing array of payments with no clear or guaranteed end point, because some creditors may agree to some type of interest rate reduction or a “lower” set-payment arrangement over several years, and some won’t.  It is very rare for all your creditors to make some change in arrangements, however minimal.


Remember this: Bankruptcy is federal law and all creditors must obey.  These debt reduction programs have no legal backing and generally the best deal they can work out is a reduction in your ongoing interest rate.


One other note: if a creditor agrees to reduce the amount you owe them, the amount reduced is taxable and the creditor must issue to you a 1099 form at the end of the year noting that this amount of reduction, and this amount must be declared as income on your income tax return.