Things You Should Know About Debt Management Programs
A debt management program is one way to dig your way out of debt troubles, but there are some things that should be considered before enrolling:
- DMPs are 3-to-5 year programs. That requires a lot of discipline and commitment. If you drop out of the program for any reason, you lose all the concessions creditors made for you on interest rate reduction and elimination of penalties for late fees, etc.
- You will be asked to close all credit card accounts while in the program. Some agencies may allow one card for emergency use, but this can be a difficult hurdle for people.
- Be sure to call your creditors and verify that they have accepted the terms of the debt payment plan proposed to you by a credit counseling agency.
- There are other debt-relief options available, including doing everything in a DMP by yourself. You could also look at a debt consolidation loan; a debt settlement program and, if your circumstances are truly dire, even bankruptcy as possible solutions.
Responsibilities in a Typical Debt Management Program
A successful debt management program involves serious discussions among consumers, nonprofit credit counseling agencies and creditors to construct a plan that eliminates all debts and steers the consumer toward responsible use of credit.
Each party has a role to play in building a foundation for success.
The consumer’s role includes:
- Be honest and accurate when providing information on income and expenses.
- Be disciplined about making full payments, on time, every month.
- Track your progress through statements every month.
- Avoid new credit. There could be severe penalties for trying to open new lines of credit.
- Take advantage of free education information provided to help in managing debt.
The credit counseling agency’s role includes:
- Thoroughly review consumer’s financial situation and suggest possible solutions to eliminate debt.
- Offer educational tools that help consumers understand root cause of their debt; why it’s important to budget properly budge; and how to avoid debt in the future.
- Work with creditors to reduce interest payments and waive or reduce penalty fees.
- Serve as liaison between consumer and creditor to arrive at affordable and acceptable monthly repayment schedule.
- Provide monthly status reports on amount paid to each creditor and remaining balance.
- Be available to answer questions while repayment process is taking place and follow up with consumer when program is completed to update educational tools.
The creditor’s role includes:
- Be open to designing a repayment schedule both sides can live with.
- Be prudent, but fair about making concessions on interest rates and penalty fees.
- Keep accurate record of payments and provide consumer with monthly status reports.
- When debt is fully repaid, send status update to national credit reporting agencies.
If the three parties work together responsibly, the program should eliminate all debts within 3-to-5 years.
Debt Management Plan FAQs
If I enroll in a debt management plan, can I continue to use my credit cards?
Most debt management companies require you to close credit card accounts since those are usually the cause of debt. Some companies will allow you to retain one credit card for emergency, travel or business use. The good news is that credit card companies are eager to renew a relationship with you when you complete the program.
How does a debt management program affect my credit?
Experian, one of the three major credit bureau companies in the U.S., said the impact on your score should be minimal if you and the agency making payments for you, are on-time every month. If lenders look at your full credit report while you are in a DMP, they will see that you are repaying the debt at a reduced rate and it may affect their final decision on whether to grant you a loan.
There are some variables in how a debt management plan affects credit, but the general rule is a slightly negative impact early because credit card accounts are closed, then a gradual positive impact as on-time payments are received and reported by creditors. When all debts are eliminated, there should be a generous impact on your credit score.
Can I have only the bills that are causing me problems involved in the debt management program?
No. All eligible unsecured debt must be accounted for in a debt management plan, even those bills that you typically have no problem making payments on. The credit counseling agency in charge of your debt payment plan will want a full accounting of income and expenses in order to arrive at an accurate amount available to make the monthly DMP payments so be prepared to include all eligible debts.
Can you enroll online?
Consumers can sign up online, but most go through a phone interview with a credit counselor to determine if their situation qualifies for a DMP. The phone interviews range from 20-60 minutes, depending on which debt management company you’re working with.
Will being enrolled in a debt management program stop interest from being charged on all my accounts?
Creditors usually make concessions on the interest rate in debt management plans – often dropping them from as high as 30% to somewhere close to 9% -- but it is rare for them to waive all interest charges. Interest rates are variable and the credit counseling agency will work to get you the best rates possible.
How does a debt management program compare with a debt consolidation loan?
Both are possible solutions to problems with debt. A debt management program is not a loan. It consolidates unsecured debts and tries to lower monthly payments through reductions on interest rates and penalty fees. A debt consolidation loan is actually a loan, with interest charges and monthly payments due. With a debt consolidation loan, you would have to qualify to borrow the amount needed to pay off your debt. The interest rate is normally fixed and, depending on your credit score and history, may need to be secured with collateral like a home or car. Debt consolidation loans usually run 3-5 years.
What are the fees?
The best debt management companies typically are nonprofit credit counseling agencies, who normally charge somewhere between $25 and $55 per month. There also is a set-up fee that varies by state, but the industry average is around $75.
What type of loans, debts and accounts can be included?
Unsecured debt such as credit cards and medical bills are, by far, the most common debts associated with debt management programs. Utilities, rent and cell phone services are other types of unsecured debt that could be part of a DMP. Some installment contracts, such as country club or gym memberships also could be eligible. There is no hard-and-fast rule for how far in debt you must be to get in a program, but most creditors and legitimate credit counseling agencies say your financial situation needs to be severe. In other words, you must owe more money than your income and savings can reasonably handle. Secured debts, such as a mortgage or auto loan, are not eligible for the program.
How long does a debt management program last?
Most reputable debt management companies offer 3-to-5 year programs to eliminate all debt. If the consumer comes into a windfall of cash, there is no penalty for paying off debt early.
What effect will a debt management plan have on my current interest rates?
The goal is to lower the interest rates you pay on all debt eligible for the program. Some debt – mortgages, auto loans – is not eligible so the interest rates there will not be affected.
When is a debt management program not the right option?
The convenient answer is: When your debt is so small that you can handle it yourself by doing a better job of budgeting; or when your debt is so large that there isn’t enough income to pay for basic living needs AND make a payment toward your debt. The truth is that everyone’s circumstances are so different that an interview with a credit counselor is the only way to know whether you qualify for a DMP.
What is the difference between enrolling in a DMP and filing for bankruptcy?
A DMP is an attempt to consolidate debts into one payment by reducing interest rates and reducing fees. Bankruptcy is a legal declaration that you can’t repay debts, even after all assets are liquidated. Filing for bankruptcy remains on your credit report for 10 years and can cause your credit score to drop by as much as 200 points.
Must all unsecured debts be included in a DMP?
Although most unsecured debts are included, not all unsecured debts qualify for inclusion in a debt payment plan. For example, most agencies allow one credit account to remain open for emergency or business use.
How do I enroll in a debt management plan?
Online research is the easiest place to find companies that do DMPs. It is suggested that you look for National Foundation for Credit Counseling (NFCC) approved non-profit agency. Credit counselors at NFCC approved agencies must be trained, certified and adhere to strict quality standards in developing debt payment plans.
What are the benefits of a debt management program?
The top benefit is that you are on a plan that should eliminate debts in 3-to-5 years and you will stop receiving harassing calls from debt collection agencies. Convenience is another plus. You make only one payment a month for your debt payment plan as opposed to numerous payments with numerous deadlines. You receive free educational material that should help you better understand how to manage debt. Finally, you can always call a credit counselor and receive free advice should your situation change.
Will my creditors still call me and send me statements?
No, creditors should stop calling you as soon as you start a debt payment plan and yes, they also will continue to send statements, which is important. Statements from the creditors should be matched up against statements from the credit counseling agency to make certain all payments are being applied correctly.
Is my information kept confidential when I enroll?
Reputable debt management companies will keep your information confidential, but be sure to review your organization’s privacy policies. If you find that they do share your information with anyone, there should be a place to opt out.
How will a creditor know that I joined a debt management program?
The credit counseling agency will inform all creditors of your intention to enroll and ask each one for concessions on interest rates charged and penalties applied to your account.
What if a creditor doesn’t agree to participate in a DMP?
The credit counselor should be able to advise you during the counseling session whether a creditor will participate. If, for any reason, the creditor chooses not to participate, the original terms of the debt remain intact.
What happens if I can’t handle the payments?
If circumstances change while you’re in a DMP and you can no longer make agreed upon payments, contact the agency and they should work with you to adjust payments accordingly.
What to do if your DMP company shuts down
Contact your bank and stop payments to the agency servicing your debt management program as soon as you become aware the agency has shut down. You should immediately contact the creditors involved and ask if you could continue paying them directly or would they work out another payment plan.
Also, ask for a credit report and verify that previous payments you made to the DMP agency were sent to your creditors. If payments were missed, there could be some negative consequences to your credit score. Finally, you could contact a nonprofit credit counseling agency and ask them to intervene on your behalf with your creditors.
Avoiding DMP Pitfalls
It’s important to investigate the debt management company prior to agreeing to terms or signing any paperwork. Search for one that is accredited.
Don’t be tempted by “credit repair” companies that promise to fix credit histories for a fee. All consumers have the right to have inaccurate information removed from a credit report without the need for an outside organization.
Most importantly, when you determine which debt management plan is most efficient, find out what services the business provides and all costs. Never rely on verbal promises. Get everything in writing, and read contracts carefully.