For those with significant debt problems, a debt management plan from a credit counseling agency can be a useful option for improving finances and becoming debt free.
However, choosing a poorly run or unprofessional credit counseling agency for a debt management plan can be detrimental to your financial future and credit goals.
Find out more about how to consolidate accounts using a debt management plan and how to choose the right agency for your needs.
A debt management plan consists of a payment schedule for you to use to pay off your debts. You agree to deposit funds with your credit counseling agency each month, which they use to pay your creditors. When you’ve completed your payments, the agency will assist you in rebuilding your credit.
Naturally, this approach places much responsibility and trust in a credit counseling agency, so it’s important to choose the right one.
When you use a debt management plan from a credit counseling agency, the agency takes your one payment to distribute money to your creditors. This option is helpful for people who want to relieve themselves from debt from multiple accounts in a responsible manner.
What these agencies can’t do is provide debt consolidation loans or settle your debts for you. However, they do have arrangements with financial institutions to lower interest rates and waive some fees so that more of your payment is applied directly to the balance.
As much as a credit counseling agency can help, choosing the wrong agency can leave you with more problems and greater debt.
You want to look for agencies that are organized, send payments and statements on time, and offer strong consumer education and support.
Lenders don’t give preferential treatment to any one credit counseling agency, so while the agency’s capabilities and skills may vary, the debt management plans have the same structure. The agency determines how much you’ll need to pay to be free from debt in three to five years.
Typically, this payment is about 2.5% of your debt, although in hardship situations, it may require less. You can also pay more than this percentage or stop the payment plan at any point.
If you’re struggling to pay for basic expenses or you have other options, a debt management plan may be somewhat extreme. With the right credit counseling agency, you’ll have an appointment to assess your complete financial situation and decide upon the right course of action.
Depending on your situation, consolidation and other relief options will be presented to you. With the right counselor, you can feel motivated to tackle your debt and be sure you’re choosing the best course of action. With the wrong counselor, such as one who acts judgmental or forceful, you may not have the same feeling.
While a debt management plan can be a great option for some people, it’s not right for everyone. If many of your balances are unsecured, such as through credit cards and personal loans, a debt management plan can help you pay them off and get on track much faster. If your debt includes tax debt, unpaid child support, or other financial liabilities, a debt management plan won’t help.
Also keep in mind that these plans last three to five years, in most cases, so you need to be sure you can maintain the monthly payment for more than a month or two.
You need only enough money for basic necessities, savings, and your debt consolidation. If you have more expenses than these items, you may be able to get out of debt faster by simply making payments.
Unlike paying your debt yourself, a debt management plan is a controlled process. You won’t have to figure out how much to pay each month and which accounts should be prioritized because these arrangements will all be done by your counselor.
Additionally, your debt management counselor will continue to pay larger payments to remaining balances after each debt is satisfied, which will help you pay off your debt faster. Plus, you won’t have to worry about collection calls any longer.
Although the credit counseling agency will be doing much of the work for you, it’s still up to you to send payments, produce account statements, and monitor the overall health of your accounts. Agency reports don’t show the interest you’re still accruing, and if you don’t send in account statements, you may not have an accurate picture of the debt you still owe.
When you enter into a consolidation plan, you agree to close your credit card accounts and refrain from opening new accounts until your current debt is paid off. This approach can be difficult for many people, especially those who are used to charging everything on credit cards.
Still, it makes sense to avoid accruing new credit card debt while you’re trying to clear your old debt. If you encounter a financial emergency, you are usually able to have one card to use.
Debt management isn’t bankruptcy or settling, but your credit report may still be impacted if the monthly payments are lower than amounts you would typically pay.
Debt management has no impact on your credit score, either, but some creditors may note that you’re paying through a third-party agency. This point may be a concern for other lenders, but not as much as bankruptcy, settlements, or defaults.
Are you struggling with credit card debt? At Solvable, we can help you understand your debt and receive the help you need to gain financial freedom. From credit education to debt relief providers, we do what we can to help you get your finances on track. Contact us today.