You’ve seen the ads for DEBT MANAGEMENT SERVICES claiming to settle $20,000 in credit card debt for as little as $2500.  You wonder, “Is there something I should do before considering Debt Management? Do these programs really work? If they do work, does debt management make sense for me? Or, are these plans really just another scam? Truthfully, are debt management services legal? If so, how does it work? Is there a downside to debt management?”

 Before you say, “That saves a lot of money. Count me in!” Carefully consider these answers to those questions:

Monkey Thinking

What Should I Do Before Considering Debt Management?

Before engaging a debt manager, consider seeking help from a credit counselor . A credit counselor advises consumers about money and debt management. More importantly, a credit counselor helps consumers create a budget and build personal savings. Many credit counselors offer classes and workshops where the consumer walks out of class with a real budget and financial plan. 

Online credit counseling courses are available.  While cheaper, they miss the human touch. A good credit counselor informs the consumer when he/she can’t help and will direct the consumer to a bankruptcy lawyer or debt manager. On the surface, this may appear harsh. Yet, a credit counselor’s candor and honesty is indispensable to consumer seeking freedom from debt. 

One final note, a human credit counselor offers something that low cost, online classes do not, accountability. Apart from job loss, medical bills and divorce, the single biggest challenge facing consumers is lack of accountability. A fantastic financial plan, developed at great cost is useless without accountability.

A human credit counselor puts a face and voice to consumer accountability. That accountability can empower the consumer to accomplish his financial plan.

Before writing a check to a credit counselor, verify his/her credentials. The Federal Trade Commission advises that a credit counselor or agency should provide free information regarding their services and their costs. If the credit counselor doesn’t provide that information, use another service. 

Also check the reputation of your potential credit counselor with the Better Business Bureau and your state’s attorney general. A quality credit counselor has few or even no complaints blemishing their professional reputations. Stay away from Yahoo, Google or similar online reviews as they can be manipulated by the person or agency being reviewed.

Does It Work

Does Debt Management Work?

“Does debt management really work?” Occasionally. 

Most consumers never complete their debt management plan. Those that successfully complete a plan, have four things four things in common. First, they have the right kind of debt. Second, they have sufficient income to weather periodic financial storms. Three, their commitment to living debt free is absolute. And finally, they need a little luck.

Debt managers rely on the practice of credit card issuers selling  their bad debt to collection agencies for pennies on the dollar and the purchasing collection agency’s willingness to negotiate favorable settlements.

Unfortunately for the consumer, not every creditor sells their bad debt and not all creditors negotiate terms on delinquent accounts. Some creditors hold firm to the credit card user agreements and pursue civil suits as part of their collections strategy. If a consumer owes money to one of those creditors, the debt management plan almost always fail. 

The success of debt management is tied directly to a reliable and predictable income. If a consumer’s income is disrupted, even for a few weeks, the debt management plan becomes shaky. If the consumer’s income is disrupted more than once, it becomes almost impossible to catch up and the plan will fail. 

If the consumer is fortunate enough that his/her incomes increases regularly, the plan payments gets easier as the plan progresses. Initially, the proposed debt management plan was based on the debtor’s income at the time the plan was crafted. In most circumstances, increased income isn’t included in the plan. Therefore, living with a debt management plan gets easier as time goes by.

If a consumer’s income doesn’t increase, the odds are that the debt management plan will fail.

Plans fail because life happens. During the three to five year “get out of debt management plan” your car gets older and requires repair. If that happens, the money that was set aside for the monthly management payment is used for auto repairs. Oops, now the consumer is behind on the debt management plan payments. Then six months later, the consumer’s water heater dies and the money that was set aside for the plan payments is spent on hot showers for the kids. Another month or two of the plan payments are missed.

After two or three similar life events, consumers decide that they can never catch up. They get discouraged and walk away from the plan. Accordingly, the plan fails and the consumer is worse off than when he/she started with the debt manager. 

To be fair, a handful of consumers complete their debt management programs. Those that do, give glowing testimonials about the debt management service. And so they should. The successful consumers accomplished something few others do. It wasn’t easy, but now they are debt free. 

Good for them. So sad and expensive for those that don’t finish. 

Does Debt Management Make Sense?

“Does it make sense to use a debt management company to get out of debt?” Rarely. 

Wait a moment Credit Monkey, you said that sometimes debt management works. Then why doesn’t it make sense? There are eight factors to consider when deciding if debt management makes sense for you as a consumer.

  • Don’t be fooled. Many debt management firms masquerade as non-profits organizations while in reality the are designed to make money from your financial distress. They may throw terms like “Accredited”, “Certified”, or “Consultants” into their names to added legitimacy. In the end though, they are for profit companies. (Be aware. Some companies call themselves debt negotiators not debt managers. In reality, debt managers and debt negotiators are essentially the same regardless of what they call themselves.)


  • Debt management services charge outrageous fees to do something that you can do for yourself. As an example, a few years ago an elderly gentleman came to me for help. He unwittingly contracted to pay more in debt management service fees than he owed for the entire amount of his debt, unconscionable. Needless to say that a threat to report the debt manager to the state attorney general got my client a speedy refund. 


  • Debt management services fees are paid before your debts. That means the consumer can make plan payments for months without paying a penny towards his/her debt. It also means that by the time you pay your debt manager services fees, you could incur additional interest, late fees, over limit fees and possibly even legal fees on your debt.  


  • The overwhelming majority of people who start using a debt management service never complete the program. In the meantime, the debt management firm makes an obscene amount of money for doing little or nothing. Furthermore, these firms usually do not refund payments made to them even if they provide no services. It’s all in the debt manager’s engagement agreement. Read the small print. 


  • Just because you engage a debt manager doesn’t mean that the harassing telephone calls or the embarrassing collections letters stop. Collection agencies can be ruthless. They want their money and will say or do anything to get it. Furthermore, they are not required to work with your debt manager and some don’t.


  • Forgiven debt is considered income by the Internal Revenue Service. You may need to pay income tax on the amount you debt manager saved through negotiation. By law, creditors must report any forgiven debt of $600.00 or more to the IRS and to send you a 1099.  On April 15th, be prepared to send the IRS $200.00 for every $600.00 you thought you saved through negotiation. By the way, don’t be surprised if your debt manager forgot to mention that.


  • Consumers should check the reputation of the debt manager they intend to use just as they would a credit counselor. You may be surprised at how difficult it is to find a reputable debt manager. Just because he/she advertises on the radio and television, doesn’t mean the company is reputable.

Consumer Financing Scams: It Even Happens to The Monkey (Almost)

Are Debt Managers a Scam?

“Are debt management services a scam?” Only if you fail to read the fine print in the agreement. 

Debt management companies are good at disclosing fees and costs. Thy are also very good at setting expectations. They must be. If they aren’t, debt management providers would accomplish nothing. All their efforts would be spent in litigation fighting to retain the fees for debt management plans never completed. 

For profit debt managers charge their fees up front. They justify their billing practices by claiming that  most of their work is completed before payments are calculated or checks sent to creditors. Its true. What is also true is that your first year’s plan payments go to the debt manager and not your creditors. That’s a lot of money that could pay down your debt rather than line the pocket of a debt manager.

Many debt managers use debt validation as part of their payment reduction plan. The Federal Fair Debt Collection Practices Act (FDCPA) created debt validation as a part of a suite of regulations intended to curb aggressive and abusive tactics by bill collectors. Debt validation requires third party bill collectors (not original creditors) to respond to consumers’ written requests for information about debts in collections.

If the third party collection agencies do do respond in accordance with the FDCPA, the debt is considered invalid and not collectible. The debt goes away so the debt manager or the consumer doesn’t need to pay it. The money allotted to pay that debt goes towards another bill or in some cases, the debt manager’s pocket. When that happens, it’s more profit for the debt manager. 

Is that a scam? Not if the debt manager discloses it and the consumer agrees to it. Is it ethical? The Credit Monkey will leave that to you to decide.

Is Debt Management Legal?

“Are debt management services legal?” Yes and no. 

Debt management companies provide services in all 50 states. That said, debt manager can’t operate offices in all states because they use a tactic called debt pooling. Debt pooling is an arrangement by which a debtor would deposit funds for the purpose of distributing such funds among his creditors. It is a method of debt consolidation.” 

Debt pooling is illegal in about half of the United States. A debt manager operating in a state where pooling is legal can still manage debts from his legal office even in states that prohibit pooling.

Debt pooling is fundamental to debt management. That is not necessarily a bad thing. Pooling permits a debt manager to selectively choose which debts to pay and how to get the most bang for the consumer’s buck. It works. That is until the debt manager needs cash today to negotiate a debt or to fend off a lawsuit and the pool is empty, spent on another debt. Then the consumer is at the mercy of his creditors. 

How Does Debt Management Work?

“How do debt managers create a GET OUT OF DEBT plan?”

Here is how a typical debt management plan works.

Upon entering the “plan” you stop making payments on your credit cards and instead, begin making monthly payments to the plan manager. Your debt manager pools your money into a fund. After the manager takes his/her fees, the debt manager waits until your credit card accounts go into default. When your accounts go into default, the manager will attempt to negotiate discounted payments for your accounts from your pooled funds. If your credit card company won’t discount the debt, your debt manager will wait until a collection agency purchases your account for pennies on the dollar. The debt manager will again attempt to negotiate a lump sum settlement at a steeper discount.

If your creditor assigns the account to a third party collection agency, your debt manager may attempt to make the bill disappear using debt validation. Debt validation is a procedure often used by credit repair companies whereby a letter is written to a collection agency demanding that the collector provide proof that it is authorized to collect on an account, how the amount due on that account was calculated and a copy of the original contract that binds you to pay that account.

Debt management companies are not credit repair companies, but use some of the same techniques. Occasionally, the manager will get lucky and the collection agency will not satisfactorily valid a debt and the account will “go away”.

What is the Downside to Debt Management?

The Monkey can hear it know. “All that sounds great. Sign me up!” 

Wait! There are downsides to debt management. Here are some of the big ones:

  • Expect to live without credit for the life of your debt management plan and perhaps for as long as two years after you complete your plan. New accounts on your credit report may trigger cancellation of your payment arrangements with other creditors. Some creditors view debt management plans like a Chapter 13 Bankruptcy  and will not extend new credit until the plan is complete.


  • If you are worried about your credit score because of work or business, be prepared to struggle during your debt management plan and for at least two years after you complete the plan. Remember delinquent payments reported, stay on your credit report for about seven years from the last date of payment.


  • Creditors have no obligation to work with a debt manager. They also are not required to reduce the amount of debt, negotiate interest rates or reduce monthly payments. Some creditors are notorious for not working with struggling consumers or their debt management services. In the Credit Monkey’s experience, American Express, Discover and Target Department Stores are the most difficult with whom to work. Some of the more ethical debt management companies refuse to manage debt owed to “difficult” creditors. 


  • Regardless of your debt management plan, if a creditor decides not to work with your debt manager; if life happens and you fall behind on your payment arrangement; or, if there is no money in the pool to pay a pending debt, you can be sued. Debt managers won’t pay your legal fees or judicial judgments. Those costs are yours and yours alone. Just so you know, your other creditors are not required to be flexible with their agreement payments so you can avoid law suits.


  • It is just as likely you will end your debt management plan with a bankruptcy as it is that you will complete the plan. It is usually cheaper to file bankruptcy than to defend a civil suit. It is also faster and less stressful to file bankruptcy than it is complete most debt management plan.

Why Consumers Attempt Debt Management? The Real Cost

“I had nothing to lose,” “I was depressed,” “I was desperate,” “I wanted to avoid bankruptcy” or some other expression to that effect are the reasons that the Credit Monkey hears when he asked his clients why they engaged a debt manager.

These all are expressions of desperation and desperation is never a good place from which to make financial decisions. To some, desperation leads to token decisions that band aid deep financial lacerations. To others, desperation leads to avoidance and avoidance to even greater economic stress.

Contrary to their own admissions, the Credit Monkey believes that consumers choose debt management because it appears to be the cheapest, easiest and least stressful way to get out of debt.Debt management appears to be the cheapest way out of debt because debt management companies advertise that they can save the average consumer thousands of dollars in forgiven and negotiated debt. It the easiest because the debt manager does all the work. And it’s the least stressful because the the debt manager takes responsibility for the debt. All the consumer must do is make on easy payment a month.

In reality, there is no easy way out of the debt. Getting out of debt requires persistence and discipline regardless of which path to financial freedom a consumer chooses follow. An honest assessment of your attitude towards money and what it means to you is a requirement. If you are not persistent and disciplined, then file bankruptcy or bury your head in the sand. The results will be the same as a failed debt management plan.

Before you sign on the dotted line and shout, “Let’s go!” do your homework. Find out the real cost of the debt management program you like best. Learn how the program will affect your credit score and your financial life for the next three to five years. (Read the small print). Finally, make sure you prepare yourself for the cost of becoming debt free. 

The Credit Monkey loves feedback. If you found this post helpful, please leave a comment, share the post or send the Monkey an email at [email protected].

If you are considering using your retirement accounts to get out of debt, you may want to read 5 COMMON SENSE RULES FOR GETTING OUT OF DEBT USING YOUR 401K for advice.