You Can’t Borrow Your Way Out Of Debt: Debt Management Programs

Quoting Professor Elizabeth Warren of Harvard Law School from her book All Your Worth: “You can’t borrow your way out of debt.”

People in debt are flooded with information that tells them that they should NOT file bankruptcy but they are told to find the answer to their debt problems by refinancing, getting a new card to consolidate, transferring balances, borrowing from friends/family, or trying a debt management program through a credit counselor.

The only way to get out of debt is to either take the debt on systematically and pay it off, or to file for bankruptcy. Paying it off is the right choice for some people if they make more than they need to live on, and make enough to use the rest to pay enough towards the balances and to eventually pay them off in full. If people need to borrow or use credit cards to pay their living expenses while they pay off other debts, all they are doing is moving debt around.

A reputable credit counselor who works with the client to review the entire financial situation can be a great help. The sign of a good counselor is one who will look at the client’s income, and all the expenses they encounter month to month, year to year, including planning for things that don’t come up all the time such as new tires and car repair, medical issues or house/appliance repairs.

You want to look for a counselor who will work with you to not only set up a plan that will work on paper, but will follow through with the client to make sure that the numbers set up are realistic and the debtor can live with it. No debt management plan will succeed if it isn’t set up in an amount that the debtor can really pay. If the counselor starts with the debt payments but ignores what it takes to pay for the client’s life, the program is more likely to fail and unfortunately, that is where many of the debt management programs begin.

The upside to debt management programs are:

■ If you get a good counselor, you get someone to work with and help you along the way. You want a counselor who works with you during the entire program, not just one who sets you up in a payment plan.
■ It isn’t bankruptcy.
■ You pay off your debts.
■ It can help lessen or stop creditor calls.

Some downsides to debt management programs are:

■ They are voluntary on the part of the creditors so they don’t have to participate.
■ Creditors are free to charge high interest rates or sue. There is no requirement or obligation by creditors to work with you, or that they can’t sue you while you are attempting a non-bankruptcy payment plan.
■ They have a negative affect on your credit rating.
■ They are only as good as the counselor that the debtor is working with, and unfortunately there are many bad ones with little to no recourse against them if they don’t do a good job.

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