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When you’re struggling with debt, your first step should always be to educate yourself about your options so you can make the best decision for you and your family. This article describes one possible option: a debt management plan, also known as a DMP. A debt management plan involves working with an agency to consolidate your payments. The agency will also work with your creditors to try to get you better terms, so you can pay off your debt more quickly.
Working with a Credit Counselor
One way to sort out which type of debt relief is best for you is to work with a credit counselor at a nonprofit credit counseling agency. You can arrange a free counseling session to learn more about your options. An experienced credit counselor will explain the pros and cons of solutions like debt management plans, debt consolidation, bankruptcy, and debt settlement. The credit counselor can also offer general financial counseling. For instance, the counseling agency can help with budgeting and other personal finance strategies.
Most credit counseling agencies also have a debt management program. So, if you choose a DMP, you may be able to work with the same agency to move forward with that plan.
How Debt Management Works
When you sign up for a debt management program, the credit counseling agency will reach out to your creditors to negotiate a payment plan that works for you. Often, they will be able to negotiate for lower interest rates. This is especially helpful if you have high-interest credit card debt. In a successful DMP, you will pay off the full amount of the debt. But, because of the new, more favorable terms, payments will be more manageable. Under your new repayment plan, you will make one monthly payment to the administrator of the debt management plan. Those funds will be passed along to creditors based on the new agreement. So, you won’t have to worry about juggling due dates and keeping up minimum payments on multiple accounts.
As long as you’re current on your DMP payments, you won’t have to worry about late fees, collection calls, or most of the other stress that out-of-control debt can bring into your life. Since your debt management plan will be built around your specific debts and income, there is no standard plan length. But, data from one of the largest debt management programs in the United States shows that most people can complete a plan in about four years.
The initial credit counseling session is free when you use a nonprofit credit counseling agency. But, you can expect to pay a set-up fee and a small monthly payment for debt management services. Fees vary depending on the agency you use and the amount of total debt you are including in your DMP. Don’t worry, though. A reputable agency will always tell you exactly what you can expect to pay in fees before they do any work.
What Debts Can be Included in a Debt Management Plan?
A DMP may be the right solution for managing certain types of debt. But, like most debt solutions, it isn’t right for everyone. One important limitation is that only unsecured debts can be included in a debt management plan. You can’t include a car loan or other secured debt in your plan. And, not all unsecured debts qualify. Most credit card accounts, personal loans and debts with collection agencies can be included. But, student loans generally can’t. In some cases, whether a certain type of debt can be included depends on the creditor.
Each creditor must agree to the DMP and the new terms. Often, major credit card companies and other lenders and debt collectors already have relationships with the agency administering a DMP. So, the credit counseling agency may know in advance whether the creditor is likely to agree. With other types of debt, such as medical bills and payday loans, the creditor may or may not agree to work with the agency.↑ Back to top
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How is Debt Management Different from Other Debt Relief Options?
With terms like “debt settlement,” “debt management,” and “debt consolidation,” it’s easy to get confused about exactly what each type of debt relief offers. Here’s a quick rundown of how debt management plans compare with debt consolidation and debt settlement.
Debt Consolidation v. Debt Management Plan
A debt management plan is a type of debt consolidation. However, when people talk about debt consolidation, they usually mean a debt consolidation loan. Debt consolidation loans can be as simple as a credit card balance transfer to a card with a much lower interest rate, or can involve a new secured or unsecured loan.
Like a DMP, debt consolidation loans are used to lower monthly payments. Like a DMP, a debt consolidation loan will reduce your interest rate. And, both debt relief options roll multiple accounts into a single monthly payment.
The big difference is that a debt management plan is not a loan. That means you don’t need a certain credit score to qualify for a DMP. You also don’t have to risk your home or other property by using it as security for a loan.
Debt Settlement v. Debt Management Plan
While a debt management plan is designed to pay off your debts in full at better terms on a schedule you can afford, debt settlement aims for partial payment. That likely sounds great, but debt settlement isn’t for everyone.
In a DMP, you make regular, affordable monthly payments that are passed through to your creditors. When you work with a debt settlement company, you also make monthly payments. But, those payments are used to build up a settlement fund. The debt settlement company won’t reach out to a creditor until you have saved up enough money to make a lump-sum payment. You may end up paying as little as half of the amount you owe. But, the creditor won’t get any payments while you’re saving up to make an offer. During that time, the creditor will likely report your missed payments to the credit bureaus, may turn your debt over to a collection agency, and may even sue you. Generally, debt settlement works best if you already have funds available to make lump-sum offers to your creditors.↑ Back to top
Debt Management and Your Credit Score
A debt management plan may temporarily lower your credit score. That happens for two reasons. Most credit card companies will close your accounts when they are included in a DMP. When those accounts are closed, you have less available credit, which means that you’ll be using a higher percentage--perhaps all--of your available credit. That’s a big negative in the credit score calculation. You may also see a drop in the average age of your credit accounts. A longer history with creditors is good for your credit score, so you may lose that benefit. How much credit scores change when you enter a DMP depends on what your credit report looked like before the change, so it’s different for everyone.
The good news is that if you keep up your DMP payments and handle any other credit responsibly, you’ll see your score start to climb again.
Some people considering DMPs are also concerned about future access to credit. Since credit card accounts managed through the program will be closed, that safety net will disappear. Of course, taking on new debt can easily defeat the purpose of the plan, and should be avoided if possible. The goal is to get out of debt, not to new current debts to the debt being paid off in the plan. But, emergencies happen. Many people in DMPs are able to take out loans for necessities, such as secured auto loans. The further you are along in your plan and the better your payment record, the more likely it is that you will be able to finance a car or home. Your DMP administrator can work with you to provide proof of plan payments and other information the creditor may need.↑ Back to top
How Upsolve Can Help
If you’re struggling with debt and aren’t sure what your next steps should be, we can help! Upsolve is a nonprofit debt relief organization dedicated to helping people live debt-free lives. The first step toward regaining control of your finances is to understand your options. An accredited credit counseling agency can be a powerful resource for people looking for the best type of debt relief for them. In addition, Upsolve provides free information and assistance to people who want to file for Chapter 7 bankruptcy on their own.
If you’re interested in bankruptcy but aren’t eligible for our free service or have a complicated case you don’t want to tackle on your own, we can help you find a local bankruptcy attorney. You may also want to speak with a bankruptcy attorney if you have a lot of secured debt--in that case, Chapter 13 bankruptcy may be a better option for you.↑ Back to top