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What is the Role of Debt Management Companies in Debt Collection?

A debt management company is one option for consumers looking for resolution to being over their heads in debt. The business model is relatively simple: the company and the debtor enter into an agreement providing that the management company will negotiate on behalf of the consumer with his or her creditors, seeking to lower payments and interest rates.

According to The Simple Dollar, debt management plans do not normally seek to reduce the actual principal balance of a negotiated debt. Rather, the focus is on adjusting the monthly payment and interest terms.

Each month, the consumer will send a lump-sum payment to the debt management company, which the company disperses to each of the creditors according to the renegotiated terms. The arrangement is likely to last three to five years, similar to the length of a Chapter 13 bankruptcy plan.

In appropriate circumstances, this arrangement may be a win-win-win for the debtor, creditor and management company as the go-between. While the creditor may decide to take less on the dollar in the long run, the arrangement may be a way to collect more than it otherwise may have through traditional collection means.

Many debt management companies are nonprofit organizations, so may be a reasonable partner between the debtor-creditor relationship when the debtor is struggling financially. Often part of the arrangement is for debt collectors to stop contacting the debtor directly, unless the management company fails to make payments on time or at all.

Most debt management companies only handle unsecured consumer debts like credit cards and medical bills. A few may work with secured debts, but rarely with student loans.

When the arrangement is carried out as agreed, the consumer also benefits from avoiding high late fees. In addition, the debtor normally agrees to close consumer credit accounts and not open new ones.

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