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Expert Q&A: Get Debt Help or Do It Yourself?

Erica Sandberg

August 25, 2011

QDear Erica,
My question is about closing your credit card accounts and taking advantage of a debt helpers payment plan. Is that better or worse than missing a bunch of payments because you have no source of income other than unemployment benefits? If I use the debt helpers payment plan, I won’t have any type of credit anymore. If I let the accounts remain delinquent until I get a job, I will still have the right to use the cards. Which is the best way? — Marc

ADear Marc,
Hmmm, I’m wondering what a “debt helper” is. I’m going to guess it’s a credit counseling agency, because they do indeed help people with their debt problems. The primary purpose of these nonprofit businesses is to provide indebted individuals with information and options concerning their finances. Most of their services are free, including a complete array of money and credit help — from budget development to bankruptcy advice.

Oh, and these agencies also set up debt management plans — DMPs for short — and it sounds like you’re weighing such an arrangement against just going off the grid for a while. To help you decide, I’ll go over the main pros and cons of the DMP — as well as the pros and cons of doing it yourself (DIY): Ask Erica

  • Pros of a DMP: Professional third party assistance can be awfully nice. Rather than pay several accounts, you only have the agency to deal with. They also may be able to get you a better interest rate than you have now, so more of your payment will go toward the principal. The entire premise of the plan is to get you out of debt as quickly as possible — at the very least before five years. Most agencies offer other programs too, such as financial education workshops and first-time housing assistance.
  • Cons of a DMP: It’s true that the agency would require you to deactivate all cards on the plan. You also may not apply for any new loans and lines of credit while you’re on the agency’s plan. Though they allow one emergency card to remain open, generally speaking, it’s back to cash, which can hamper your lifestyle. (Then again, this can also be considered a benefit, since you can’t get into any more debt.) Other downsides: Some creditors note your participation in the plan on a credit report, and a future lender may or may not consider that a bad thing.

Now for the DIY plan … which may actually be your true option because a credit counseling agency is not allowed to have someone go on the DMP unless they can afford it. You’ve got to be able to cover your basic expenses and have money left over for your debt. Therefore, if you’re collecting unemployment, you may have to remain independent anyway.

  • Pros of a DIY plan: You don’t need a third party to help. Let them know that you are currently unemployed and would like a temporary reprieve. Be specific about what you want and can do. For example, ask for four months of reduced payments and a suspension of finance charges. This can save you from credit damage and ballooning balances. When you’re back on your feet, you can resume payments as before, and you won’t have to open up a brand new account.
  • Cons of a DIY plan: There are no guarantees that the creditor will consent to your proposal. If that happens and you can’t make the payments as you should, the account will go delinquent, your credit report will suffer and the interest rate, as well as your liability, will probably increase. They can even send the account to collections or sue you for the debt.

So my answer is this: If your negative station will end soon and you’ll be back at work earning as normal in a few months, try to arrange something on your own. If not, the DMP may be your best way to mitigate credit and financial damage — and if that doesn’t work, the credit counselor will suggest other ways to deal with the problem.