Debt Management Programs : What is a Debt Management Plan? How can it help?
What is a Debt Management Plan? How can it help?
A debt management plan (DMP) is a strategic effort to eliminate unsecured debt such as credit cards and medical bills. A program will educate you on how to successfully manage your debt.
A debt management plan is NOT a loan. In a typical program, debt management companies work with creditors on your behalf to reduce your monthly payment and interest rates on your debt and waive or reduce any penalties. The parties agree on an affordable payment schedule that allows 3-to-5 years to pay off your debt.
A debt management plan is part of the package of debt consolidation plans that are designed to help people regain control of their finances while reducing unsecured debts. An unsecured debt is one that is not backed by collateral, and includes credit cards, medical bills and student loans.
It is one of several ways you can take control of your debt and reduces the number of payments you make each month and can save you money in interest and fees.
Those who enroll make monthly deposits with a credit counseling organization, which then is used to pay the debts according to a predetermined payment schedule developed by the counselor and creditors. Your monthly payment is tailored to what the customer can afford, and you know before agreeing to take part in the program what that monthly amount is. An analysis of household income vs. expenditures determines the monthly payment.
Advantages of a Debt Management Plan
Offers credit card consolidation without a loan
It will help you stay more organized and punctual with your bills and payments.
It creates a realistic monthly budget with a financial goal.
Making regular and timely payments can improve your credit report and credit score over time.
Creditors or collectors have incentive to stop calling.
Considering a Debt Management Plan
Before you sign up for a debt management plan, choose a credit counseling organization to help you with the process. Many of these organizations are nonprofit and may offer counseling sessions free of charge, while others charge fees.
The Federal Trade Commission (FTC) recommends finding a reputable credit counseling organization that uses certified counselors trained in consumer credit and debt management. They can help manage debt as well as develop a practical budget. Debt.org offers a team of debt relief professionals who can help as well.
It’s also vital to check with the local consumer protection agency, the Better Business Bureau and the state Attorney General’s office to ensure there haven’t been any consumer complaints and the organization is licensed.
Beware of hidden fees, scams and fraudulent organizations. Look up a company’s record with the Better Business Bureau to check its track record. Once you find a credit counselor with whom you’re comfortable, he or she will review your finances and help you create a budget, as well as help you decide whether a debt management plan is right for you.
Some points to remember when enrolling in a DMP:
It can take 36 to 60 months to repay debts using a DMP.
The organization may restrict the consumer from using or applying for additional credit while enrolled in the plan.
If DMP payments are late, the consumer may lose progress on decreasing the debt and lowered interest rate or fees.
You may qualify for lower interest rates on your debt and a lower monthly payment.
Signing up for a Debt Management Plan
If you decide a debt management plan is right for you, your credit counselor can help you enroll. He or she will work with your creditors to negotiate interest rates and to come up with a payment schedule, which you will review and approve before beginning the plan.
Once it is determined how much money is left after basic living costs like rent, mortgage, utility bills, secured loans and living expenses are paid, the remaining amount can be divided among creditors.
Then, you’ll make a deposit monthly to your credit counseling organization. In turn, the organization will distribute the money to your creditors according to the agreed-upon payment schedule.
Participating in a debt management plan will cost you very little. After counseling sessions, you should only pay a small one-time set-up fee and a small monthly maintenance fee. Avoid any credit counseling organization that requires an application fee, membership fee, upfront fee or per-creditor fee.
After you enroll in a plan, follow these guidelines to help ensure that the program is working for you:
Make note of which of your debts and bills will be paid via the DMP and which ones you still must pay on your own each month.
Pay the counseling agency on time each month.
Review your monthly statements to ensure that the counseling agency is paying your bills on time and according to plan.
A debt management plan typically takes care of only unsecured debts.
Step-by-Step Process for Debt Management
If you are interested in participating, it is best to go online to research the best debt management companies and find one you are comfortable using.
There are nonprofit and for-profit companies that offer DMPs. The nonprofits are considered more reliable because their credit counselors are trained and certified by the very respected National Foundation for Credit Counseling.
Before calling a company, make a list of your monthly income and expenses. Be as accurate as possible, using recent pay stubs and bank statements, along with a list all bills paid and unpaid. Have all that information available when you call the company.
Here is step-by-step description of what to expect from a good debt management company:
- Be prepared for an interview that will touch on all areas of your income and expenses, including rent, utilities, credit card bills, medical bills and any other financial obligations.
- During the session, the counselor will pull your credit report and verify information with you. This is a “soft pull” which means there will be no effect on your credit score.
- The counselor should make suggestions on areas where you could decrease spending and increase income as well as offer free education material for use down the line.
- The counselor will evaluate your position and If your cash flow situation is still a negative, the counselor could offer a debt management program as a solution.
- If you agree to enroll in the program, the counselor works up a budget proposal and sends it to your creditors for them to approve or make a counter proposal.
- You and the creditor have to agree on the final terms that include monthly payment, fees involved and how long the payment schedule will run before the debt is eliminated.
- In most cases, when both sides agree to the terms the counselor will ask for your bank account information so that monthly payments come automatically from your account. The payment goes to the credit counseling agency, which then disburses money to the creditors under the agreed upon terms.
- The agreement is sent you via email or regular mail. Once it is signed and returned (typically one day for email, 3-5 business days for regular mail), the program begins.
- You will receive monthly statements from both the creditor and the credit counseling agency. Compare the two statements to be sure payments are credited properly.
- If one debt is paid off before the others, your monthly payment remains the same. Any extra funds are split among the remaining creditors to pay off those debts faster.
If you have any questions about the terms or conditions, call the credit counseling agency in charge of the agreement. They are your liaison with creditors and can smooth out any issues you have.
If you suddenly run into an unexpected amount of money, you can pay off your balance early with no penalty.