debt

New loans doable with debt management plan

Steve BucciQuestionDear Debt Adviser,
My question concerns so-called debt management plans, or DMP, administered by nonprofit credit counseling agencies. How is a DMP viewed by lenders? If you apply for new credit while in a debt management plan, would it affect your ability to get a car loan or mortgage? How does a DMP differ from debt settlement?
-- George

AnswerDear George,
Let's take these issues one at a time, beginning with debt management plans.

When a DMP is set up by a nonprofit credit counseling agency, part of the process involves the agency contacting your creditors. The creditors are told that the agency will be making your payments for you. Typically, the counselors ask for concessions on interest rates or fees to make the plan fit your tight budget. Most creditors will try to help.

However, some will have system limitations that require them to charge off the account in order to reduce the interest rate below what they offer the general public. A few are just plain miserable and will charge off the account regardless.

If the account is not moved to a charged-off status, the lender may report the account as current (which would be good) after a payment or two. They may also add a notation to your credit report saying that the account is in credit counseling. This notation will be removed as soon as you leave the DMP.

The DMP is not part of your credit history subject to seven-year reporting. So having some accounts on a DMP may be less important to the lender than how bad your credit was before the DMP. In other words, how far behind were your accounts before you sought help?

Lenders will look at your credit report and probably your credit score. If your accounts were seriously past due or charged off and in collections, then your credit score is likely pretty low. One positive is that the scoring companies do not decrease your score because of your DMP status. So, if your accounts were in good standing before the DMP, and you don't have any accounts charged off or reported as late during your plan, your score shouldn't suffer.

Some lenders may view the fact that you sought professional help and are paying what you owe through a DMP as a positive. If you meet the other loan requirements such as income and job stability, then you will likely be offered favorable terms based on your credit history.

But some lenders may consider the fact that you went for help as a negative, and be reluctant to offer you preferred terms. My advice is just to shop around for a lender that views your situation in a more positive light.

Some people confuse debt management with debt settlement. It's easy to do with the number of misleading ads out there today. Settling an account for less than the total owed is a serious breach of contract. You did not do what you said you would. And the lender didn't get its money back.

Lenders do not like to see settled accounts. As they see it, you failed to meet your obligation once. What's to keep you from doing it again?

If you have no choice other than a DMP to meet your obligations, I wouldn't worry about your credit. If you have other options, perhaps you should explore them.

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