How to Become Debt Free With a Debt Management Plan in California

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Written by Upsolve Team.  
Updated January 3, 2020

Summary

Now that you have a general idea of what a California DMP is, you would probably like to know where to begin. The following sections will explain how to take your first steps to obtain your own California debt management plan.

Living in a state with a high cost of living and above-average housing costs like California, it is easy to find yourself in a financial situation every month where you are unable to pay your bills as they become due. According to thePublic Policy Institute of California, 30% of mortgaged homeowners and 46% of renters spend more than 35%  of their total household income on housing, compared with 21% and 40% , respectively, nationwide. This means that compared to other consumers nationally, Californians have less money left over to pay other bills. If you are struggling to pay unsecured debt like high-interest rate credit cards, then a California debt management plan may be a good fit for you.

ACalifornia debt management plan is an agreement between you and your unsecured creditors that allows you to combine all of your credit card debts into one account managed by a non-profit credit counseling agency. As part of the repayment plan, you will be usually be granted a lower interest rate than you were paying previously, get extended repayment terms and have over-the-limit and late fees waived. You then make one lower monthly payment to the non-profit credit counseling agency every month until the total debt is repaid in full.

One of the benefits of a California debt management plan over other forms of debt consolidation is that you are not required to take out a new loan. In fact, most California debt management plans prohibit you from opening new credit while you are in the plan. But, since you are not taking out a new loan, you don’t have to have good credit or a high credit score to get approved for a California debt management plan.

One of the risks of starting a California debt management plan is having to adjust to one large monthly payment rather than several smaller payments. Being sure you are able to make your monthly payment when it’s due will require careful planning and sticking to a realistic budget

Is a California Debt Management Plan the Same as Debt Consolidation?

Debt consolidation encompasses several methods of consolidating several debts and their payments into one debt with one payment. One of these methods is a California debt management plan. But a debt management program is not the only form of debt consolidation. Other types of debt consolidation include credit card balance transfers, home equity lines of credit, refinancing your mortgage or obtaining a new personal loan. Each of these methods has its benefits and its risks. Credit card balance transfers are perhaps the riskiest method because they are often tied to promotional interest rates that rise significantly if the balance you transfer is not paid off in full. In addition, you are not required to close your other lines of credit when you do a credit card balance transfer meaning you can run those credit card balances back up again and be in a worse situation than before. But refinancing your mortgage or obtaining a home equity line of credit can also be risky since both involve putting more debt on your home and potentially losing your home if you default on either. Opening a new personal loan is often the preferred form of debt consolidation but it is usually only available if you have good credit and there is no guarantee you will be offered a lower interest rate even if you are approved for the loan.

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How to Become Debt Free with a DMP in California

Now that you have a general idea of what a California DMP is, you would probably like to know where to begin. The following sections will explain how to take your first steps to obtain your own California debt management plan.


Find a Credit Counseling Agency

Your journey to becoming debt free in California begins with finding a reputable non-profit credit counseling organization. In California, all private debt management service providers, also known as “general proraters”, must be licensed to do business in California under the Check Sellers, Bill Payers and Proraters law. Presently there is only one licensed “general prorater” in the State of California.

Luckily, non-profit credit counseling organizations are exempt from the licensing requirement, provided they comply with California laws governing non-profit credit counseling organizations. A current list of non-profit credit counseling organizations authorized to assist consumers with a California debt management plan can be found here.

However, even though a non-profit credit counseling organization may be authorized to offer debt management services in California, that doesn’t mean it has been accredited. Accredited non-profit credit counseling agencies have to abide by certain quality standards set by credit counseling organizations like the Council On Accreditation (COA) and the National Foundation of Credit Counseling (NFCC) that grant their accreditation. These standards are designed to ensure that the credit counseling agency deals with the public in an open, honest and professional manner. Foremost among these standards is that all non-profit credit counseling agencies that are accredited provide initial credit counseling free of charge. There are several non-profit credit counseling agencies accredited by the NFCC that are authorized to offer debt management services in California, such as Money Management International, or the Consumer Education Services, Inc. (CESI).

What to Expect at Credit Counseling

Your initial credit counseling session will be a one-on-one financial counseling session between you and a certified credit counselor. Your creditors will not take part in the session and nothing you tell the counselor will be shared with the credit bureaus. The session will focus on you and your current financial situation, with an emphasis on putting together a monthly budget and identifying a debt management program that is best for you. The credit counselor will ask you about your income, your debts and the circumstances that may have led up to your financial problems. They may also offer to review your current credit report with you. Finally, the credit counselor will help you come up with a plan and a recommendation for becoming debt-free. Many credit counseling agencies offer the initial credit counseling session in-person, over-the-phone or online. Typically, you can do an online or telephone session 24 hours a day. To obtain an in-person session you will usually have to make an appointment.

Making the Decision & Getting Started

When you have completed your initial credit counseling session you are under no obligation to go forward with your credit counselor’s recommendation. In addition to the recommendation, you should also receive educational material explaining more about debt consolidation and a California DMP that you should read and review before making up your mind to get started. Some of the things you should consider before making up your mind include:

  • Do you have additional questions that were not answered? If so, call your credit counselor and discuss them. Your questions should be welcomed and not excused or trivialized.

  • Can you stick to the budget? The budget you put together with your credit counselor is a roadmap to becoming debt-free. If it is unrealistic, let your credit counselor know and start over.

  • Have you considered all your options? Your credit counselor should have discussed several types of debt consolidation and debt relief programs with you. If you feel one is a better fit for you than what your credit counselor recommended, call them and let them know. They will usually be able to tell you why they recommended the debt relief options they did and why the option you are considering may not be a good fit for you.

  • Do you understand all the set-up fees, monthly fees, and costs? You may or may not have discussed fees and costs at your initial credit counseling session since they will usually depend on what debt relief option you choose. But make sure you understand what fees and costs you will be responsible for if you go forward.

Put Together Your California Debt Management Plan

The first thing you and your credit counselor will do after you have made the decision to get started is to put together your California debt management plan. To do this your credit counselor will need several important documents. These documents may include:

  • Credit card statements showing your current balances, minimum payments, due dates, penalties and fees owed on your credit card accounts;

  • Your cardholder agreements disclosing the terms and conditions on all your credit card debt;

  • Your bank accounts;

  • You pay statements showing your monthly income and the frequency with which you get paid;

  • Your credit report listing all of your current creditors and the status of your accounts;

  • Information pertaining to other secured and unsecured debts you pay every month like payday loans, student loans, auto loans, medical bills or personal loans in order to complete your budget;

  • Other information on your personal finances requested by your credit counselor to negotiate with the credit card companies.

Finally, you should also realize that unlike your initial credit counseling session, your creditors will be contacted to obtain their agreement to your California DMP. Your credit counselor may have to share certain of this information with your creditors in order to obtain their agreement to your California DMP. They will also use this information to negotiate more favorable terms for you like a lower interest rate, extended repayment terms, waived over-the-limit and late fees and sometimes even a reduction in principal. 

Begin Payments

Most California debt management plans will allow you to begin making payments into the plan before all of your creditors have agreed to it. This is in order to have the first payments for the plan fully funded when all your creditors do sign-on. But you have a right to know when you first payment is due, how much is due and what will be done with it. You should also find out when you can stop making payments to each of your creditors if you have not already done so.

But once you do begin making payments, it’s extremely important that you make all your payments on time, or even early, and you pay the full amount due. If you miss a payment or pay less than the amount due, your creditors may not agree to the plan at all or may withdraw their agreement after doing so.

How to Stay Current With Your California Debt Management Plan

Sticking to a California debt management plan that may extend over three to five years, not only requires discipline on your part but it also helps to be proactive. It is imperative that once you begin to make payments on our DMP that you stay current with all your payments. In order to make this more likely there are a few things you can do now to be prepared.

First, make sure the due date for your DMP does not conflict with any other large payments you have to make that month. Typically, this will be a car loan or mortgage payment. If you can’t move one of those dates, ask your credit counselor if you can move your DMP date. As a rule of thumb, try to avoid setting it for the first or last day of the month.

You should also plan for unexpected expenses and emergencies. If you did your budget correctly, you should have already allocated money to cover irregular expenses like annual car registration fees, quarterly insurance payments, tuition, and membership fees. But you should also plan for unexpected expenses like car or home repairs and emergencies like medical illnesses or natural disasters. If you have not, talk to your credit counselor.

Finally, think of ways you can reward yourself and create milestones to celebrate so you don’t have to wait until the very last payment on our DMP to feel as though you’ve accomplished something. Talk to your counselor about big milestones to mark in your monthly reports like paying off your first creditor, making your first six payments on time or reaching the halfway point in your plan.

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California Debt Consolidation

A Californiadebt consolidation loan is also another form of debt consolidation. A debt consolidation loan involves taking out one large loan, usually unsecured, to pay off several other loans. A California debt consolidation loan differs from a California debt management plan in that non-profit credit counseling agencies do not offer debt consolidation loans and usually can’t help you obtain one. In addition, unlike a debt management plan, you usually have to have good credit and an above-average credit score to get approved for an unsecured California debt consolidation loan.

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California Debt Settlement

Californiadebt settlement is another form of debt relief but it’s the same as a debt consolidation. Instead, debt settlement occurs when you get one or more of your creditors to take less than they are owed to settle your outstanding debt with them. Debt settlement plans are risky because they are often solicited by third-party debt settlement companies who advise you to intentionally stop paying your credit card bills in order to convince your creditors to settle the debt. Because most creditors will not even consider a debt settlement until you are seriously delinquent, if you follow this advice, your FICO credit score will be severely damaged whether they agree to settle the debt or not. A debt management plan differs from debt settlement because even if you are not behind on your bills, you can take advantage of a California debt management plan.

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California Bankruptcy

Debt consolidation is a worthwhile form of debt relief when the majority of your debts are unsecured debts and you have a regular monthly income. But if you are unemployed and without any income or have a disproportionate amount of secured debt that can’t be consolidated. If that’s you, California bankruptcy may be a good option for debt relief. Bankruptcy is a legal form of debt relief that discharges or “eliminates” your debts even if you have no income. Your non-profit credit counseling agency can also provide you with bankruptcy counseling if you request it. If bankruptcy is your best option, Upsolve may be able to help you file for free.

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