As the worldwide financial crisis continues to deepen, consumers are increasingly turning to debt management firms to get help with their ever-increasing stack of bills. With a debt management plan, you make one monthly payment which is distributed to your creditors proportionately. Enrolling in a plan to help you erase your debt may be beneficial to debtors who owe less than £10,000 in unsecured debt and at least £100 in disposable income each month.
Although UK residents can turn to any one of the numerous debt charities to get free help with managing their debt, too often, they end up contracting the services of a for-profit debt management company. An ongoing investigation by the Office of Fair Trading has revealed widespread abuse and exploitation within the industry. If you’re considering seeking debt help from a fee-based organization, you need to understand the potential dangers you may face.
Danger #1 – Excessive Fees
For-profit debt relief agencies make money by charging their customers a fee for services rendered. Depending on the company, you may be assessed an initial consultation fee, a monthly maintenance fee, a flat fee for settling a debt or all three. While you may be able to negotiate a lower monthly payment with your creditors, the money you save may end being redirected to the debt management company. You can potentially end up paying more than you originally owed and extending your debt repayment period by months or even years.
Danger #2 – Poor Communication
One of the biggest attractions of for-profit debt management companies is their advertisements, which promise overwhelmed consumers a fast and easy alternative for getting out of debt. Credit counsellors are trained to “sell” customers on the benefits of their program without encouraging them to read the fine print. Too often, the focus lies on increasing the company’s bottom line, rather than helping consumers learn how to manage their money and get out of debt. Before you sign a contract with any debt management company, you should know how much your payment will be, how it will be distributed to your creditors, when the payment is due and the number of payments you’ll be responsible for. A qualified non-profit debt charity can give you detailed information about the pros and cons of debt management and provide a customized solution to fit your needs.
Danger #3 – Potential for Scams
One of the biggest risks associated with for-profit debt management companies is that some of these organizations exist solely to defraud their customers. While you’re paying hundreds of pounds to the debt management firm each month, the company may be simply pocketing your money without paying anything to your creditors. Meanwhile, the interest and penalties on your debt continue to accrue. By the time you begin receiving collection calls from your creditors, your financial situation may be exponentially worse than it was when you originally enrolled in the debt management plan.
While not all for-profit debt management firms engage in unfair or fraudulent practices, the lack of industry regulation creates a serious risk for unsuspecting consumers. If you’re drowning in debt, enrolling in a debt management plan may be the best choice for dealing with your financial crisis. Enlisting the aid of a non-profit debt organization firm can ensure that you get the help you need while avoiding the potential pitfalls of the for-profit debt management industry.
About the Author
FPT is a writer, the owner and managing editor of Financial Planning Tips – (Twitter follow: http://twitter.com/fptguy) – attempting to liven up the topic of personal financial planning – while helping to guide folks to financial security and freedom.