Debt Management Plans: How Credit Counseling Can Help[yoast-breadcrumb]
Debt Management Plans: How Credit Counseling Can Help
Debt – it’s something most of us deal with at some point. And when it starts to feel overwhelming, it can really take a toll on your finances and emotional wellbeing. But there are solutions out there to help you regain control of your debt, like working with a nonprofit credit counseling agency to set up a debt management plan (DMP). DMPs can be a great option to simplify payments, lower interest rates, and pay off debt faster. Here’s an overview of how they work and if it could be the right debt relief strategy for your situation.
What is a Debt Management Plan?
A DMP is a structured repayment plan set up through a credit counseling agency to help you tackle credit card or other unsecured debt. The credit counselor works on your behalf to negotiate with creditors and come up with a consolidated monthly payment that works for your budget. This can make juggling multiple payments much easier.
The credit counseling agency distributes your monthly DMP payment among your creditors – you just have one bill to pay to the agency each month. Creditors often agree to lower interest rates through a DMP, so more of your payment goes to paying down principal rather than interest charges. This can help you pay off debt much faster and for less money overall.
How Does Credit Counseling Help with a DMP?
The nonprofit credit counseling agency is really the key player that makes a DMP work. Here are some of the ways they provide value:
- Financial assessment – Review your income, expenses, and debts to determine if a DMP could work for your situation.
- Education – Provide guidance on budgeting and managing finances.
- Negotiation – Work with creditors to get concessions like reduced interest rates.
- Consolidation – Combine multiple payments into one monthly payment you make to the agency.
- Distribution – The agency distributes your payment to creditors for you each month.
- Support – Credit counselors are available to answer questions and provide assistance.
- Motivation – Ongoing education and resources to help you stay on track with payments.
This third-party assistance can provide tremendous value in simplifying payment logistics, reducing interest expenses, and helping you successfully tackle debt through the DMP.
What Are the Pros of a Debt Management Plan?
Here are some of the biggest benefits that make a DMP a smart debt solution for many people:
- Lower interest rates – Creditors often agree to reduce interest rates substantially through a DMP, sometimes by half or more. This cuts the total interest you pay and helps you pay off debt faster.
- Lower monthly payments – Your payment to the credit counseling agency is based on what you can afford. Payments are often lower than the total minimums due to creditors.
- Consolidated payment – You make one payment to the counseling agency instead of tracking multiple bills and due dates.
- Pay off debt faster – Reduced interest rates mean you pay off principal faster. Counselors aim for 3-5 year payoff.
- Save money overall – You can save thousands in interest charges by cutting rates through a DMP.
- Nonprofit agencies – Reputable credit counseling agencies are nonprofit, so their goal is helping – not making money off you.
- No loan required – DMPs provide debt relief without needing to take out a loan like debt consolidation.
- Stop collections calls – Creditors will stop calling once you start a DMP since they know they’ll get steady payments.
For many people struggling with high credit card balances and interest rates, a DMP can provide a structured plan to eliminate debt in 3-5 years through more affordable monthly payments.
What Are the Cons of Debt Management Plans?
DMPs do come with some potential drawbacks to consider as well:
- Monthly fees – Credit counseling agencies charge a monthly fee, often $25-50. This covers administering the DMP.
- Credit score impact – Your scores may drop when accounts are closed and balances paid through a DMP.
- No additional credit – You agree not to open or use any additional credit until the DMP is completed.
- Credit freeze – Existing credit lines are usually closed out as balances are paid through the DMP.
- Tax implications – Any savings from reduced debt may be considered taxable income.
- Long process – It can take up to 5 years to complete a DMP and become debt-free.
- Missed payments – Falling behind on your DMP payment can negatively impact credit and terminate the program.
The monthly fees and credit score impact may be biggest drawbacks for some people considering a DMP. But many still find the pros outweigh the cons for the opportunity to consolidate payments, reduce interest, and eliminate debt faster.
Who is a Good Candidate for a Debt Management Plan?
So when does it make sense to set up a DMP versus considering other debt relief options? Good candidates for a successful DMP often have:
- Unsecured debt over $10,000 – Credit cards, medical bills, personal loans, etc.
- High credit card interest rates making balances hard to pay off.
- Sufficient income to maintain living expenses and pay a monthly DMP amount.
- A desire to pay off debt in 3-5 years through a structured repayment plan.
- Motivation to stick to a monthly budget that aligns with the DMP payment.
You’ll discuss your specific situation with a credit counselor to determine if a DMP is affordable and the best path for you. Those facing major hardships making even minimum payments may need to consider other options like debt settlement or bankruptcy.
How Do I Get Started with a Debt Management Plan?
If a DMP sounds like it could provide the structure and savings you need to tackle debt, here are some tips for getting started:
- Contact a reputable credit counseling agency – Nonprofits like NFCC members are a safe bet. Be wary of any agency that pushes a DMP without assessing your situation.
- Complete a financial review – Be open about your income, expenses, and debts so they can give sound advice.
- Ask questions – Make sure you understand how the DMP works, what the fees are, and what the process will be like.
- Compare multiple agencies – Each may have different approaches, services, and fees – compare offerings.
- Sign up – Enroll with the agency you feel will serve you best and get started on the path to becoming debt-free.
The credit counselor will take care of contacting your creditors and setting up the DMP once you enroll. All you have to do is make the new consolidated monthly payment to the agency on time. It can take discipline and commitment to stick to the program for 3-5 years until all your debt is repaid. But the savings in interest and simplified payment process make it worthwhile for many people seeking to eliminate debt.
The Bottom Line
Debt management plans facilitated by credit counseling agencies can be a smart strategy for tackling debt through consolidated payments, lower interest rates, and a structured payoff plan. Take time to understand how DMPs work, weigh the pros and cons, and speak to a nonprofit credit counseling agency to determine if it’s the right debt relief option for your situation. With commitment and follow through, a DMP can put you on the path to financial freedom from burdensome debt in just a few years.