Switching from a Debt Management Plan to a Debt Consolidation Loan- Advice and Implic

[logisticsd]

We are in a debt management plan and it has been great. It allowed us to go from $46k in debt to $25 in 2 years. Here is my dilemma. We area thinking about switching to a debt consolidation loan to pay off the rest. We want to buy a house and I believe it will look more favorable than being in a DMP. Also, it will change our payment from $1100 to about $300. My main question is that is we go the debt consolidation route should we cancel the DMP first and then pay the credit card companies direct or pay the DMP company to pay it off. I was thinking it is better to cancel and pay the credit cards off directly. How would that look on credit or change anything. Also, is we paid directly would the CC companies not close account just show zero balance.
Thanks

[disneysteve]

We area thinking about switching to a debt consolidation loan to pay off the rest.

A loan won't "pay off" anything. It will just move the debt around.

it will change our payment from $1100 to about $300.

That would suggest that it will now take you 4 times as long to pay off the debt. Bad idea!

Give us more info and we can give better advice.

How much do you earn?
What are your current monthly expenses?
How much do you have in savings?
List your debts with balances and interest rates.

Buying a house may or may not be a good idea depending on the answers to those questions.

[Jluke]

First, nice job in paying down your existing debt by ~20k in 2 years.

If you want to buy a home, that would imply you have 20% downpayment saved up... which would most likely be higher than your current debt amount.

So why not just pay off the debt rather than going further in debt with a house?

Additional details will really help...

[clatoden99]

Well you are likely going to have some type of fees associated with the new loan. Also, depending in what the loans amounts are on the loans you are consolidating, you can actually end up paying more in interest over the life of the consolidated loan. The positives are you are making one payment, and that payment can be more affordable than what you have now.

[Outdoorsygal]

This is who we used many decades ago. http://www.consumercredit.com/
Consumer Credit Counseling & Debt Consolidation

They discuss your questions with you and advise you how to continue. An attorney who works with this non-profit phoned the CC Companies for us and got the interest rates down. They were sky high. We wrote just one check to this agency and they paid our debtors. All of our debt was due to medical bills put on CC's. We never missed the min payment
The address to the agency was placed on our Credit Report as our home address. We then had money for food, I was going hungry much of the time


.

[Outdoorsygal]

Make sure the company is legit. There are a ton of scams out there

[GoodSteward]

I've checked into debt management plans years ago. I have a couple questions for you. Assuming you signed up for them to make your payments:

1. Are you allowed to use your credit while under the agreement with that company? They told me I was going to have to get approval from them to use my credit for anything while under the agreement. I would check this.

2. Didn't you have to close the credit cards associated with the DMP in order to get the lower rates and have them managed? They told me I was going to have to because they didn't want me using it while they were paying it off, obviously. lol

The point of the DMP is to get out of debt and help you manage your payments for you, and getting a consolidation loan is technically getting into more debt. If you are planning to buy a house without 20% down (first time home buyers programs can offer 100% financing) that isn't a good idea unless you know your payment will be less than what you are paying now (including taxes/insurance/PMI). If you are hoping to go house hunting, this sounds like it will end up being a bad move right now because you may end up increasing your payments, which is what it sounds like since you are wanting to free up cash flow with the loan. However, without the rest of your numbers, this is all speculation.

As for your how this will affect your credit since you need this to buy a house, it really depends on what else is going on with your report.
- If you close out those credit cards(assuming they are not closed yet), it will remove the limits from to the total you have which may hurt your score if you don't have other cards that are empty with good limits.
- If these are the only credit cards you have and you close them all out, it will decrease your score significantly, especially if you don't move the debt to the consolidation loan. Your credit card usage-to-limit will hit 100%, and your score will tank.
- If you close the accounts, it will also remove the history of the accounts(time they've been open, not payment history) which will make your Avg credit account age shorter and will hurt your credit. It appears as if you haven't had credit as long.
- Pretty sure getting a 21k loan will affect your score negatively, and you want as little recent activity on a credit report as possible as far as new inquiries, accounts, etc.

I suggest buying the house before messing with your credit (unless the move will help it), or do what you need to with this loan but leave the credit card accounts alone until you have bought. If you are allowed to get the loan, you would pay through the DMP, but I'm thikning there is more to this than you may realize. Check with the DMP company for your options.

[dczech09]

We are in a debt management plan and it has been great. It allowed us to go from $46k in debt to $25 in 2 years.

So you paid off $21,000 in two years? That is about $875 per month... Yet your monthly payment is $1,100?

I would check your figures to be sure, but you may be getting ripped off to the tune of $225 per month! I mean yeah your debt management servicer ought to be paid for their efforts, but a fee of 25% of your debt payment is excessive.

Here is my dilemma. We area thinking about switching to a debt consolidation loan to pay off the rest. We want to buy a house and I believe it will look more favorable than being in a DMP.

With all due respect, you are probably in no position to be buying a house any time soon. You are under debt management, which suggests that you have had trouble making payments on your debts. And you want to take on a home mortgage?

I typically recommend people meet 5 criteria for a home purchase on a mortgage...

1. 20% down-payment
2. Emergency fund of 3 to 6 months worth of expenses
3. Payment (PITI) not exceeding 28% of income
4. Conventional fixed rate loan, 15 years
5. No other debts (or minimal if any)

Please reconsider. Unless you (at the very least) meet the first 3, you will run into trouble.

There is no doubt that being out from the DMP will look more favorable. A potential lender will see that you are in a DMP which will make them very uneasy about lending to you because it suggests that you have had trouble sticking to loan terms. In fact, debt management plans and Chapter 13 bankruptcy are basically the same thing (the only differences are that Chapter 13 is filed with the courts and provides legal protections such as automatic stay).

A conventional mortgage lender will not issue a mortgage until at least 4 years after the bankruptcy is discharged; 1 year for FHA lenders. You may run into these same underwriting guidelines after ending a relationship with a DMP.

Also, it will change our payment from $1100 to about $300.

I echo disneysteve's concern that this will multiply your time in debt by 4.

My main question is that is we go the debt consolidation route should we cancel the DMP first and then pay the credit card companies direct or pay the DMP company to pay it off. I was thinking it is better to cancel and pay the credit cards off directly. How would that look on credit or change anything. Also, is we paid directly would the CC companies not close account just show zero balance.
Thanks

I think credit impact may be moot at this point. While your FICO score is unaffected by you being in a DMP, the remark still remains on your credit report and lenders will likely look at that the same as a bankruptcy. So the damage may already be done that you will not get approved for a mortgage any time soon. Which is actually a blessing in disguise because you will be best served by finding ways to improve your overall financial situation (and not be chasing the American dream).

Closing credit card accounts typically has a small negative impact on your credit score, but it is temporary. As you pay off your debts, your credit will heal.

Regardless of any of this though - I am going to urge you to not do the consolidation loan as that will put you in debt for a longer period of time, AND cost you more in the long-run. I am also going to urge you to find a way out of the DMP. It is really not working that great for you (hate to burst your bubble).

I know this is a lot of information that I have thrown at you. But you do not need a consolidation loan, a DMP, or a mortgage. You need a solid financial plan that you can implement yourself. And that will come with you providing more details as others on here have suggested.

[GoodSteward]

So you paid off $21,000 in two years? That is about $875 per month... Yet your monthly payment is $1,100?

I would check your figures to be sure, but you may be getting ripped off to the tune of $225 per month! I mean yeah your debt management servicer ought to be paid for their efforts, but a fee of 25% of your debt payment is excessive.

DMP doesn't remove the interest, it just lowers it. Usually to around 5-10% unless those figures have changed in the last 6 years. That difference is between interest and the fee they will charge (20-30$ a month).

In fact, debt management plans and Chapter 13 bankruptcy are basically the same thing (the only differences are that Chapter 13 is filed with the courts and provides legal protections such as automatic stay).

I forgot about this when I posted about it before on this site. It does put a mark on your credit similar to bankruptcy, but their reasoning was that you shouldn't be using your credit anyway if you need a DMP.

Closing credit card accounts typically has a small negative impact on your credit score, but it is temporary. As you pay off your debts, your credit will heal.

If they are all the credit cards he has, yes it could hurt a lot. However, I think they are already closed to be in that DMP. Credit cards are the main account that usually has age to it since instalment loans will go away eventually and don't count as heavily. Closing out credit cards is terrible for credit scores due to killing history, limits, and raising debt to limit if in use. It really just depends on a lot of other factors as to how much weight the cards in question have on the score.

[dczech09]

DMP doesn't remove the interest, it just lowers it. Usually to around 5-10% unless those figures have changed in the last 6 years. That difference is between interest and the fee they will charge (20-30$ a month).

Good point. I did not factor in interest to my math.

At a rate of 5% APR, the OP would have paid a total of $26,400. $25,075 would have went to the principle and $1,325 would have went to the DMP ($55 per month).

It would be a mathematical impossibility for the interest rate to be 10%.

If the interest rate was lower than 5%, then the fee to the DMP would be larger.

I will retract my concern that the OP may be getting ripped off, however this still begs the (rhetorical) question: is that $1,325 paid to the DMP worth it? After all, there is nothing that a DMP does that we can do ourselves (negotiate with creditors for lower rates, restructure loan terms, pay the creditors).

[GoodSteward]

I will retract my concern that the OP may be getting ripped off, however this still begs the (rhetorical) question: is that $1,325 paid to the DMP worth it? After all, there is nothing that a DMP does that we can do ourselves (negotiate with creditors for lower rates, restructure loan terms, pay the creditors).

Again, only stating from my experience 6 years ago. I could only get a lower rate from 1 of my 6 cards I had, and that one required me to close the account to get it. These companies have some kind of agreement that allows them to get the rates, and they are fixed rates for that company. They don't "negotiate" each time, they just get that rate when you sign up and the credit card company is notified. Basically, they snowball for you. That's it. The only real benefit is getting lower interest rates and having one payment.

I wanted to look it up to be sure I remembered right. Form Credit.org
"All of the consumer’s credit cards must be closed, while on the plan, and no new credit may be obtained."

So it isn't as simple as just consolidating payments. You can't do anything on credit, and you lose all your accounts. DMP is not a good option, but may be better than a bankruptcy if you are struggling that bad.