Nonprofit consumer credit counselors play a useful part in the debt relief industry in Arkansas and nationwide. They are generally honest players in a sector that includes fraud, deception and greedy scams meant to benefit a so-called debt relief company and not the consumer debtor. Despite their usefulness, the law does not yet require consumer credit counselors to advise clients on the comparative benefits of filing a bankruptcy. That is a serious deficiency because often the best option for people in serious, overwhelming debt is to erase the debt right away in bankruptcy and move on without lingering in debt for many more years.
Consumer counseling agencies run debt management plans for consumer debtors. They take a monthly payment and distribute it to creditors, all of whom have presumably agreed to participate. The payments may go on for many years. In the meantime, no new lending accounts may be opened by the consumer.
There are problems that this type of plan can produce for some consumers, especially those with very large unsecured debt balances due. The program can fall apart if the consumer misses one or more of the monthly payments. All of the money already pumped into the payments will generally be lost in a sea of new dunning, harassment and newly inflated bills. This can even happen within months prior to finishing the payment plan, thus resulting in an even worse disaster.
Another example of an unreasonable use of this program is to put someone who owes an excessively large amount of unsecured debt in it. One couple paid off $120,000 in unsecured debt through an agency, but it was when the man had Alzheimer’s disease. Instead of quickly wiping out the debt and allowing themselves the use of those funds during the man’s last years, the agency allowed them to spend years pumping their money into paying off high-interest, penalty-laden credit card accounts. Bankruptcy law in Arkansas and nationwide requires consumers to consult debt counselors prior to filing bankruptcy, but experts suggest that the law should also require consulting with a bankruptcy attorney prior entering a debt management plan.
Source: dailyherald.com, “Do debt management plans work?“, Liz Weston, Aug. 7, 2016