Are you tired of having your life interrupted by creditor phone calls? Have you disconnected your phone to avoid dinnertime interruptions, only to face threatening letters in the mail? If you can’t make the monthly payments and you are tired of watching interest and fees cause your balances to rise, you have several options. One choice many people consider is a debt management plan (DMP).
Whether you face student loans, medical bills, or simply mounting credit card debt, many people today are in over their heads with unsecured debt.
What Is a Debt Management Plan?
When you sign up for a debt management plan, you can work with a credit counseling agency or organization to help get control of your debt and develop a three- to five-year plan to pay it off.
First, you’ll work with the credit counselor to determine how much you can afford to pay your creditors each month, based on your household income and expenses. Your credit counseling organization negotiates with your creditors on your behalf to reduce your interest rates (or even to stop interest from accruing) and reduce or eliminate fees. Then, you make monthly payments to the organization, which pays your creditors directly.
Benefits of a Debt Management Plan
A debt management plan can help you feel as if you’re finally getting a handle on debt by:
And here’s the big one: A DMP can help you see the light at the end of the tunnel of debt, knowing you’ll have it all paid off within a set time frame—and that you’re already starting to rebuild your credit as you do.
How a DMP Works
Your DMP provides a clear-cut way to get out of debt within a set time frame, usually three to five years. You’ll no longer have to deal directly with your creditors, and you’ll only have to make one monthly payment to your credit counseling organization, deducted automatically from your bank account on the same day each month, to start paying down your debt.
Your credit counseling agency will negotiate with creditors on your behalf to reduce or eliminate additional interest charges and fees, as well as negotiate lower monthly payments, so you can see results faster than you might if you continued to make your minimum monthly payments on your own.
You’ll still be responsible for any secured debt, household bills (such as utilities), and any unsecured debt not included in the plan.
Preparing for a Debt Management Plan
While a DMP is an effective way for many people to get out of debt, it is not easy. In fact, the initial process may seem arduous, and making payments on your plan requires a certain level of discipline and sacrifice.
To prepare for your initial interview with the credit counseling organization, list your monthly income and expenses. If you aren’t sure where to start, consider tracking all your purchases for a week or two before making the call. You can also rely on programs or apps, like Mint or YNAB, to track your expenditures automatically.
Having this information in hand will make your initial call go more smoothly, and you can make decisions about your financial future as an educated consumer.
What to Expect When You Set Up a DMP
During the initial interview, the credit counselor will look at all your income and expenses, including secured and unsecured debt, utilities, and other expenses that come up regularly or sporadically.
Looking at your budget, the counselor might make recommendations of places to cut expenses or even ways to earn more money.
The credit counselor will also pull your credit report to verify information. This is a “soft pull,” which means it won’t affect your credit score. If you find any mistakes on the report, your counselor will show you the steps to take to correct them, which will help your situation as your credit score begins to rise again once you are making on-time monthly payments as part of your plan.
If your budget indicates that a DMP could help you get out of debt, the counselor will work with you to create a budget proposal that gets submitted to each of your creditors. The creditors can approve the proposal or make a counteroffer.
Once the parties reach an agreement, you can approve the proposal or not. The proposal will include the:
Once Your DMP Is In Place…
Once the DMP is in place, your credit counselor will ask for your bank account information in order to deduct payments automatically on a date that you choose. When choosing this date, consider the due dates of your other bills and the dates that you get paid. Be sure to leave time for any incoming payments to clear before the money is deducted.
You’ll receive an agreement via email or regular post to sign and return. Each month, both your creditors and the credit counseling organization will send you statements to reconcile. Many fraudulent debt consolidation firms do not offer this service; they take your money and fail to pay your creditors. Even if you fully trust your credit counselor, bookkeeping errors can happen. Compare the two statements each month to be sure your creditors receive the money they are due.
If one creditor is paid off before the others, you’ll continue to make the same monthly payments. The funds will be distributed amongst the remaining creditors.
If your income should increase or you receive a windfall in the form of a tax return or any other “extra” money, you can pay off your DMP in full with no penalty. If you don’t have the total amount, you can pay a large lump sum in order to pay the debt off faster.
Your Role in a Debt Management Plan
As appealing as a DMP sounds when it comes to reducing your overall debt, it’s not without sacrifices. You’ll be paying off your debt for three to five years, which requires diligence and discipline. But if you continued to make the minimum monthly payments on your credit cards on your own, it could take much longer.
Additionally, your credit counseling organization will probably require you to close out all credit card accounts, including those which may not be part of the DMP. You also won’t be permitted to apply for new credit. Can you live strictly on cash while continuing to make the monthly payments to credit counselor and pay your other bills?
The best thing you can do throughout the process is to be honest—with yourself and with your credit counselor. Adhering to your responsibilities will help you develop good credit habits and, ultimately, re-build your credit score. These responsibilities are:
The Credit Counseling Agency’s Role in a DMP
It is your credit counselor’s duty to:
Your Creditors’ Role in a DMP
Your creditors, too, have an important role in the success of the DMP, beyond just collecting the payments owed. Creditors should be open to negotiating a debt management plan that works, keep accurate records of payments, and provide you with monthly statements.
Additionally, once the debt is re-paid, your creditor should send a notice to all three national credit reporting agencies, which will help improve your credit score.
Is a Debt Management Plan Right For You?
Undoubtedly, a debt management plan can provide manageable monthly payments, an eventual end to credit card debt, and the first step toward better credit.
But there are also other options you can explore, including:
Like a DMP, any of these actions will have ramifications and require financial sacrifice.
Alternatively, you can negotiate a DMP yourself, but you’d still have to make multiple payments to each creditor each month. A certified credit counselor has the knowledge and expertise to negotiate a fair deal on your behalf.
If all three parties—yourself, your credit counselor, and your creditors—work together a DMP can represent a manageable solution for what may feel like an unmanageable problem right now.