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When paying off debt is a struggle, enrolling in a debt management program is one possible solution.
Debt management plans, or DMPs, can combine multiple debt payments into one so that they are easier to repay. Other benefits may include interest rate reductions or fee waivers.
While debt management can help you get out of debt faster and with fewer headaches, it’s important to consider the pros and cons first.
What is debt management?
Simply put, debt management is a structured plan for paying off unsecured debt, such as credit cards.
A person who feels overwhelmed by their debts can turn to a debt management company or credit counseling agency for help paying off what they owe. The debt management company or credit counselor will review their financial situation and then work with the debtor and their creditors to create a debt management plan.
Debt management plans generally allow three to five years to pay off debts included in the plan. As part of the plan, creditors can agree to lower interest rates and reduce or waive certain fees.
After everyone involved agrees to a DMP, the debtor makes a monthly payment to the debt management company or credit counselor. This payment is then distributed among the creditors included in the debt management plan.
Debt management can be an option if you have unsecured debt that you need help getting under control. The types of debt that you may be able to repay through a debt management program include:
In return for helping you with your debt, the debt management company or credit counseling agency may charge a fee for their services. This may include an initial DMP setup or registration fee, as well as a monthly fee. Monthly fees can be included in the amount you pay monthly for your debt management plan. In certain cases of difficulty, these fees may be reduced or waived.
Benefits of Debt Management Plan
There are several advantages to using debt management to pay off unsecured debt. Some of the benefits include:
- Simplified payments. Debt management plans can simplify payments, since you will only have one payment to make each month instead of paying multiple creditors.
- To save money. If your debt management plan includes interest rate cuts and fee waivers, it could help save you a decent amount of money.
- Win time. Enrolling in a debt management program can also save you time if you are able to pay off your debt faster. And you have the predictability of when your debt will be paid off.
Debt management can also help you avoid potentially negative consequences if you risk falling behind on your payments. Missed or late debt payments can result in late fees, which are on top of what you owe. They can also damage your credit rating, making it more difficult to approve new loans or lines of credit.
Enrolling in a debt management program can also help you avoid collection actions. In the worst case scenario, you could be sued for unpaid debts. But debt management can make it easier to keep your accounts up to date.
Disadvantages of Debt Management Plan
While there are some advantages to debt management, it is not necessarily a perfect solution to paying off debt. Here are some of the biggest pitfalls to know:
- Limited to certain types of debt. A debt management plan is generally intended to be used for unsecured debt like credit cards or personal loans. You generally cannot use debt management for auto loans or other secured debts.
- Creditors may not agree. A key part of your debt management success relies on the agreement of your creditors. If some of your creditors agree but others don’t, it could make it harder to pay off what you owe.
- Closure of credit accounts. In most cases, you may need to close one or more credit accounts to enroll in DMP. This means that you will not be able to use these cards and you may be prohibited from applying for new credit.
A side effect of closing credit accounts while you’re on a debt management plan is the potential impact on your credit score. Much of your FICO credit score is based on your credit usage, which is the percentage of your available credit that you are using. The lower this number, the better.
When you close accounts included in a DMP while a balance is still owed, it may reduce your credit limit. As a result, your credit utilization rate could increase, which could adversely affect your credit score.
It is also important to consider the commitment involved. Debt management plans only work when debtors commit to carrying them out. But if they don’t address the underlying issues of overspending or take the plan seriously, it could end up being a failure.
Debt Management vs Debt Consolidation vs Debt Settlement
Debt management and debt consolidation are sometimes used interchangeably, but they are not the same thing. With debt management, you create a plan to follow in paying off debt. Debt consolidation, on the other hand, involves combining several debts into one.
For example, you could take out a debt consolidation loan and use the proceeds to pay off all of your credit cards. You would then make a payment for the debt consolidation loan in the future. Another option for consolidating credit card debt is a 0% APR balance transfer offer.
Debt consolidation may or may not save you money on interest and fees. A lot of it depends on the terms of the debt consolidation or balance transfer loan offer you get. The repayment time for consolidated debt may vary depending on the length of the loan or the length of a 0% APR balance transfer offer.
In between, debt consolidation can offer more flexibility than a debt management plan. If you aren’t necessarily struggling with debt, you may want to consider consolidation options first before exploring a DMP.
Debt settlement allows you to settle debts for less than what is owed. For example, if you owe a credit card $ 5,000, your credit card issuer might agree to let you pay $ 3,500 and forgive the rest. This strategy assumes that you have cash on hand to pay the agreed amount. It also assumes that you are behind on your bills and that your credit score has suffered.
Debt settlement can be an option if you are behind on your debt payments and want to avoid filing for bankruptcy, although some experts recommend bankruptcy over debt settlement. It is possible to negotiate a debt settlement with creditors directly or through a debt settlement company. Keep in mind that debt relief companies charge a fee, usually a percentage of the debt amount, for these services and it may take time to see results which can lead to further damage. to the credit score.
If you think debt settlement is your only option and you need help with the process, choose a reputable debt settlement company.
Who is a debt management program for?
Overall, a debt management plan might be right for someone who:
- Struggling to keep up with debt payments
- Wants to streamline monthly payments
- Would like to save on interest and fees
- Can afford the monthly payments required by a DMP
If you’re not sure whether a debt management program is the best option, talking to a certified credit counselor can help. Credit counselors can look at your income, budget, expenses, and debt to assess whether a DMP is right for you. And, if not, they can also help you decide whether you should consider another option, like debt consolidation or even bankruptcy.
You may not need any of these options. Instead, you might just need someone to help you tighten your budget so that you can find the extra money to reduce your debt. Again, this is something that a credit counselor can help you with.
How to Choose a Debt Management Program
If you think debt management is the best way to deal with your financial situation, it’s important to compare companies carefully. While many legitimate companies offer debt management services, the industry also has its fair share of scammers.
When looking for debt management companies, check their credentials first. Look for a credit counselor certified by the National Foundation for Credit Counseling (CNFC) or the Financial Counseling Association of America (FCAA).
Then ask them for details about the services they provide and the fees they charge. More specifically, find out about:
- What types of debt you can register in a DMP
- How long do the plans last
- Interest rate reductions and fee waivers
- Estimated monthly payments
- Initial and monthly fees
Also, make sure you understand what your responsibilities are once you enroll in the plan. For example, it’s important to know when your payments are due and what can happen if you miss a payment or pay late. The more questions you ask up front, the fewer surprises there will be once you are officially enrolled in a debt management program.