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

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Written by Upsolve Team.  
Updated April 27, 2020

Summary

If you want to find a way out of debt, your first step should be educating yourself about all of the debt management options available to you. Read on to learn about working with an agency to bundle your debts into a single account, paid every month (often with better terms) negotiated between a nonprofit credit counseling agency and your creditors.

A debt management plan is a type of debt relief that involves working with a credit counseling agency to find a single, monthly, predetermined payment solution that will be acceptable to you and your creditors. Essentially, once your creditors agree to the terms of the plan (the agency will negotiate with your creditors in an effort to secure lower interest rates and monthly payment obligation amounts) you’ll pay the agency a single amount monthly. The agency will then distribute that payment to your creditors so that you no longer have to pay multiple accounts each month. This process can reduce the stress and hassle of keeping up with multiple payments. It generally provides those with less than perfect credit an opportunity to consolidate their debt when a loan or balance transfer isn’t available. 

Note that the benefits of Kentucky DMPs are somewhat limited. Only some unsecured debts, such as credit card bills and personal loans, can be included in a Kentucky debt management plan – federal student loans and secured debt generally can’t be consolidated in this way. Additionally, other debts such as medical bills, may or may not be covered depending on the credit counseling agency’s relationship with those who “own” the debt in question.  If you can’t stick to the plan, you may end up in more debt as penalties and default interest rates kick in. Finally, you also aren’t generally allowed to accumulate new debt while you’re paying off debt via a DMP. 

Overall, if you can follow a budget, stick to deadlines, and avoid unnecessary spending as your DMP process progresses, it may allow you to repay your debt at lower interest rates (and in lower overall monthly payment amounts) than you do now. You’ll also benefit from the streamlined approach instead of juggling obligations to multiple creditors at all time.

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

A Kentucky DMP is a form of debt consolidation. However, when people refer to “consolidation” more generally, they usually mean a debt consolidation loan. A debt consolidation loan is a new line of credit taken out to combine multiple debts into a single account. Consolidation loans are often better for people with higher credit scores because they can keep their accounts open while benefiting from a streamlined approach and lower interest rates. However, it’s important for people to remember that a low credit score may make securing a debt consolidation loan impossible. 

By contrast, in a Kentucky DMP, you’ll work with a credit counseling agency to come up with one payment per month that will be disbursed to your creditors through the agency until you become debt-free in regards to your consolidated accounts. In essence, debt consolidation can be accomplished by taking out a new loan or by using a DMP to combine existing debts into a single, streamlined account that likely features better rates than you’re paying now. 

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How to Become Debt Free with a Debt Management Plan in Kentucky

If you want to find a way out of debt, your first step should be educating yourself about all of the debt management options available to you. Read on to learn about working with an agency to bundle your debts into a single account, paid every month (often with better terms) negotiated between a nonprofit credit counseling agency and your creditors.


Find a Credit Counseling Agency

The first step to building your Kentucky debt management plan is finding a reputable credit counseling agency to work with. There are for profit and nonprofit agencies in operation but working with an accredited, nonprofit agency is your best bet. A for profit agency generally charges for all of its services, while a nonprofit credit counseling agency is able to offer a free initial credit counseling session to anyone who is interested in learning more about their financial options. If you choose to enter into a DMP with a nonprofit agency, there will be some fees charged unless you qualify for a fee waiver. However the initial credit counseling session will always be free if you work with an accredited, nonprofit agency. 

In the end, if you decide to use a for profit credit counseling agency, be sure to ask about costs – both up front and down the road. You are always allowed to ask what happens if you can’t afford their fees down the road, as well as how your credit counselor is compensated. Credit counselors who receive incentives for signing people up for services are less likely to make recommendations based solely on your needs. This is one of the many reasons why working with a nonprofit agency is generally a better idea than working with a for-profit company. 

When selecting a specific nonprofit agency, look for an accredited nonprofit because they are bound to follow the highest quality standards and ethical guidelines in the industry. The National Foundation for Credit Counseling (NFCC) is the largest nonprofit financial counseling organization in the country. All member credit counseling agencies listed on the NFCC website must be certified by the COA. The Council on Accreditation (COA) is the independent company that reviews credit counseling agencies and their practices to determine whether they’re worthy of accreditation – only those demonstrating best practices receive this designation. And just to be extra cautious, you can also check with the Kentucky Attorney General’s Office for a history of complaints against any credit counseling agency you choose. By researching an agency’s reputation now, you may save yourself a significant headache down the road.

What to Expect at Credit Counseling

The idea of meeting with a credit counselor may sound intimidating, but don’t worry. Your initial credit counseling session is just an upfront conversation between you and a certified counselor from your credit counseling agency, usually over the phone or in person, about your financial situation and your  debt relief options. It’s completely confidential, so your creditors won’t know what you talked about or that the conversation even happened. 

Before the initial counseling session, which should take an hour or less, getting some documents together will make it easier for your credit counselor to provide you with personalized guidance. Gather records concerning your sources of income together and make a list of your debts. It’s helpful to have the total debt owed per creditor, minimum payments per month, and interest rate if you can find this information in time. A copy of your credit report, which can be ordered for free, is a helpful way to access a current list of your secured and unsecured debts. 

You and your counselor will go over your income, general monthly expenses, and your list of debts. Once you figure out financial goals, your counselor will make suggestions and you’ll develop an action plan. If one of the recommendations is a debt management program, you’ll be able to ask your counselor whether the agency is in a position to manage your particular DMP. 

Making the Decision & Getting Started

When you’re constructing your DMP, you and your counselor will need to discuss logistics in detail. You should ask yourself first whether you can stick to a budget and make your payments every month, on time, as defaulting on your DMP may leave you in a worse financial position than you are now. It may take time to determine whether your budget can accommodate a DMP repayment. But don’t fret. Your counselor shouldn’t pressure you to make a decision at the end of the initial session – even if they’re telling you that you’re a good candidate for a Kentucky debt management plan. 

Before you commit to the DMP option, you’ll also need to ask your counselor about fees. Most credit counseling agencies charge a fee for managing your Kentucky debt management plan – this is legal in the state, but Kentucky law dictates that it is no more than $50 annually and either $30 monthly or the greater of 8.5% which is built into the monthly consolidated payment. Even with the fee included, your single payment every month could still be considerably lower than your previous payments. You’ll also be out of debt much more quickly. Not that Kentucky law prohibits the credit counseling agency from charging you more than $75.00 for an initial set-up fee. 

Make sure you explore all your options before you commit to a plan. There are many loan consolidation options, and (alternatively) bankruptcy may also be a solution to your financial challenges depending on your situation. If you want to speak with a Kentucky bankruptcy lawyer when weighing your debt management and debt relief options, Upsolve can help you find one that may be able to help you make an informed decision about your situation as a whole. 

Put Together Your Kentucky Debt Management Plan

As you and your counselor put together your Kentucky debt management plan, you will need to provide the agency with detailed financial information so that your credit counselor can prepare a comprehensive plan on your behalf. Don’t be surprised if they need credit card account and bank account information, debt statements, and credit cardholder agreements. This information is important in calculating an accurate payment that creditors are more likely to accept, and that you can afford. Putting this plan together in an intelligent, informed way is probably the most important thing you’ll do outside of making your payments on time. 

Begin Payments

Once a monthly payment has been established, your credit counselor should be very clear with you about the amount you’ll owe each month and the due date for that payment. Usually after you start making the payments you’ve agreed to in your action plan, your credit counseling agency will reach out to your creditors and negotiate with them. The goal is to have them accept the action plan and to establish a binding agreement. If you’re anxious while waiting for their response, you can speak to your credit counseling agency to get updates on individual creditors. With that said, if your credit counselor thinks you have a solid plan in place, there should be little to worry about. When you’re working with an accredited, nonprofit agency, they usually know how to predict payment terms that creditors will accept. Credit counseling agencies also have long standing relationships with banks and lenders, so they should be able to give you a timetable on the approval process. 

Once you begin making payments, your credit score may initially decrease as creditors begin closing your accounts. Don’t panic! Keep paying on time – early if you can. As you pay down debt balances, your score should start to rise again. Just stick with your budget and be sure to speak to your counselor if your financial situation changes at all.

How to Stay Current with Your Kentucky Debt Management Plan

Developing a system is a good way to stay on top of your Kentucky DMP. It’s critical to keep track of your personal finances so that your Kentucky debt management plan can ultimately be successful. You already went over your expenses and income with your credit counselor – continuing to track those expenses and sticking to a budget can be helpful in ensuring that you  have enough income available to make your monthly payment by the due date. Spreadsheets and budgeting apps can be helpful to track your spending. 

Remember to leave some room in your budget for a rainy-day fund. Emergencies do come up, and sometimes an unexpected large expense like an auto repair is unavoidable. You don’t want an emergency to derail your ability to keep making your payment. If an emergency, large expense, or change in your financial situation happens and you’re having trouble managing it, talk to your credit counselor about what to do regarding your payments to keep your Kentucky debt management plan on track. 

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Kentucky Debt Consolidation

Although a DMP is a type of debt consolidation, people referencing “debt consolidation” are usually referring to a debt consolidation loan. Kentucky debt consolidation loans can involve applying for a new secured or unsecured loan or transferring your credit card debt to a different card with lower interest rates and lower monthly payments. This debt consolidation option combines multiple debts into a single account that is paid monthly, just like the DMP process. Note however that this option may not be available to people with low credit scores or who have no collateral to use when applying for a secured loan. If you have poor credit, a DMP is a better debt consolidation option. 

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Kentucky Debt Settlement

A Kentucky DMP is a repayment plan that creates a better schedule and better terms for you to repay your debts in full. By contrast, the goal of debt settlement is partial payment of a debt in exchange for partial loan forgiveness and the closure of an account. 

Debt settlement involves contacting an individual creditor and settling the amount due for less than your total debt owed. This is usually accomplished via a single lump payment directly to the creditor or 2-3 payments managed by a debt settlement company. You may settle for a lot less than your amount owed, but there are risks involved. Creditors don’t have to agree to settle your debt and many companies offering debt settlement services aren’t trustworthy. This is usually the best option only if you already have funds available for a lump sum payment and your credit score is already damaged.

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Kentucky Bankruptcy

If debt consolidation loans, debt management programs, and debt settlement don’t seem like the right debt relief options for you, you may be able to file for a Kentucky bankruptcy. Chapter 7 bankruptcy offers an effective way to eliminate many of your debts. If you are considering bankruptcy, check to see if you are eligible for Upsolve’s help. We can help with completing confusing forms and following Kentucky’s rules for filing bankruptcy without the expense of hiring an attorney. 

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Upsolve is a 501(c)(3) nonprofit that started in 2016. Our mission is to help low-income families who cannot afford lawyers file bankruptcy for free, using an online web app. Spun out of Harvard Law School, our team includes lawyers, engineers, and judges. We have world-class funders that include the U.S. government, former Google CEO Eric Schmidt, and leading foundations. It's one of the greatest civil rights injustices of our time that low-income families can’t access their basic rights when they can’t afford to pay for help. Combining direct services and advocacy, we’re fighting this injustice.

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