Using a Debt-Management Firm

Debt-management firms help businesses overwhelmed with debt get back on track.

Using a process known as debt consolidation, these firms negotiate with creditors for better terms on unsecured loans such as credit cards, medical bills, utility bills, and IRS debts.

The new terms may include reduced monthly payments, reduced interest or no interest, or waivers of late and over-the-limit fees. Don't confuse debt consolidation with debt-consolidation loans, which involve taking out new, usually lower-interest loans to pay off several higher-interest loans.

Debt consolidation can save you money and get collection agencies off your back. Plus, you make only one monthly payment to the debt-management firm, which pays your creditors.

Unfortunately, you can't always escape damage to your credit record. Creditors may still report you to a credit bureau for late payments; however, this is not nearly as damaging to your credit report as bankruptcy.

When to Use a Debt-Management Firm
Debt management is typically for small businesses on the verge of bankruptcy, but this isn't always the case. Sometimes it's better to use debt consolidation sooner rather than later. Your debt ratio — the percentage of your after-tax income that goes to paying off debt — is a good indicator of potential problems. Most experts agree that a manageable debt ratio is 40 percent or less. If your debt ratio is 50 to 70 percent, you could probably benefit from debt consolidation.

If you're late on several bills and some of your debts have gone into collections, you should consider contacting a debt-management firm. In addition to debt consolidation, debt-management companies can also help clients manage money through services like credit counseling, budgeting workshops, and crisis relief.

There are many debt-management firms, both for-profit and not-for-profit. Some even operate over the Internet. To find a reputable firm, it pays to do a little homework.

• Check the company's standing with the Better Business Bureau office where the company is located.
• Find out how often the agency pays creditors. The more frequently (once a week or more) the better, since this will help keep your interest and late payments to a minimum.
• Ask if the company keeps a reserve fund. This is your insurance in case the debt-management company you've chosen goes out of business after it gets your money.