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Debt Management and Debt Settlement



If you are struggling with debt, your options can be confusing. You may be contacted by or see advertisements for companies offering to lower your payments or “repair” your credit. Before making any decisions, you will need to make sure that you have enough information to make the right choice for your situation.
A good first step may be to contact a credit counseling organization. Credit counselors will review your financial situation and explain your available options. In Maryland, you can contact Consumer Credit Counseling Services. Other resources for finding a credit counselor include the Financial Counseling Association of America or the National Foundation for Credit Counseling . The Consumer Financial Protection Bureau has more information on credit counseling.

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Debt Management

One option may be a Debt Management Program (DMP). Debt management involves negotiating a plan with a creditor to make payments more affordable. This can be done by lengthening the term of repayment, lowering the interest rate, or waiving fees. It is a service that may be provided by a credit counseling organization, but can also be done on your own or through a debt management company. Some things to keep in mind:

  • It does not include the forgiveness of any principal owed.
  • It will have a negative impact on your credit rating, as creditors will record on your credit report that you are on a DMP. But the notation will be removed once you repay the debt.

Debt Management Companies

Debt Management Service (DMS) providers take payments over a period of time and distribute them among your creditors. In Maryland, DMS providers are required to be licensed by the Commissioner of Financial Regulation. You can search for a licensee here. If you decide to use the services of a licensed DMS provider, the Maryland Debt Management Services Act (Maryland Code Annotated, Financial Institutions § 12-901 et seq. ) will govern. Some of the law’s requirements for these services and agreements:
  • A debt management services agreement must be signed by you and the provider.
  • A provider can charge a one-time consultation fee, but it cannot exceed $50.
  • The provider may charge a monthly fee of $8 per creditor, but the total monthly fee may not be more than $40.
  • You have the right to cancel the agreement at any time without penalty.

More information on the Maryland law can be found here.

Debt Settlement

Debt settlement is a service offered by third-party companies, although it can also be done on your own. It generally involves an agreement to make a lump-sum payment in return for the forgiveness of a portion of the principal owed. It is usually only an option if you are already in default. (For credit cards you have to be around 180 days behind in your payments to even be considered.) Some concerns with debt settlement:

  • The amount of any forgiven debt is considered income which the creditor is legally required to report to the IRS, thus leading to tax obligations.
  • Since the account is usually in default before any agreement is reached, it will remain on your credit report for seven years, thus affecting your credit score, as well.
If you are not already in default, you should be wary of companies that tell you to withhold payments from creditors in order to resolve the situation. Debt settlement should only be considered if you absolutely do not have the resources to pay off the debt or have already defaulted.

Debt Settlement Companies

Debt Settlement Service providers negotiate to settle your debt. In Maryland, Debt Settlement Service providers are required to be registered with the Commissioner of Financial Regulation. You can search for a registered company here.
The Maryland Debt Settlement Services Act (Maryland Code Annotated, Financial Institutions § 12-1001 et seq. ) governs these companies. A company cannot charge a consumer a fee until:
  • A debt settlement services agreement has been executed;
  • The company has altered the terms of at least one individual debt specified in the agreement; and
  • The consumer has made at least one payment in accordance with the agreement.
There are other specific requirements for debt settlement services agreements outlined in the law, and consumers have the right to withdraw from the agreement at any time without penalty.

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Should I use a Debt Management or Debt Settlement Company?

Both debt management and debt settlement can be done on your own by contacting the creditor directly. If you don’t feel comfortable doing this, many companies offer these services. But they can be expensive, and may not operate in accordance with the law. As noted above, credit counseling organizations may offer debt management services, but will not usually offer debt settlement services. When choosing whether to use any particular company, you must do your research and know your rights:

  • Only do business with properly licensed and registered companies.
  • Always have a signed, written agreement that is in compliance with the law.
  • Never make upfront payments without confirming whether they are allowed by law.
It is important to carefully research any company with which you are considering doing business, as there are many bad actors out there who may not have your best interests in mind. Contact the Maryland  Commissioner of Financial Regulation with specific questions about licensing or the law.

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