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If you’re burdened by unsecured debt bills (credit cards, medical bills, personal loans and other debt not collaterally backed), a debt management plan can help you successfully manage your debt.
What is a Debt Management Plan?
A Debt Management Plan (DMP) is a structured program designed and managed by a credit counseling agency that works on your behalf to negotiate lower interest rates and monthly payments with your creditors.
Instead of having to keep track of multiple payments every month to different creditors, a DMP allows you to make one payment to your counseling agency, who then makes the appropriate disbursements to your creditors according to terms structured in the plan.
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In an initial 45-90 minute counseling session, you will receive actionable advice from a credit counselor regarding your options toward reducing your debt and controlling expenses customized to your specific financial situation.
Be prepared to discuss all areas of your income and expenses – have a clear picture of your monthly cash inflows and outflows. Know how much money you have left over after accounting for necessities such as rent, food, transportation, utility bills, etc.
Have a clear picture of your unsecured debt situation – know how much you owe on all of your individual credit cards, their respective interest rates and minimum monthly payments, as well as any outstanding medical bills and other financial obligations that you may have.
These will all be discussed in an interview with your credit counselor, who will also refer to your credit report to verify the information you share.
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How to pick a credit counseling agency?
A good credit counseling agency will provide a realistic budget for you, given your specific financial situation. If you enroll in a Debt Management Plan (DMP), a good counseling agency will ensure that proper concessions are put into place, maintain clear communication with your creditors, and distribute proper payment amounts to individual creditors as structured in the DMP.
The Federal Trade Commission (FTC) recommends working with a credit counseling agency staffed with certified debt counselors who can help develop a budget and debt management plan for you following an interview.
Read reviews on the counseling agencies you interview to learn experiences other folks had. There should be no hidden fees – in fact, many reputable credit counseling agencies operate as non-profit organizations.
Avoid any counseling agency that attempts to charge upfront fees – including an application fee, “membership” fee, or any per-creditor fees. However, you should expect to pay regular monthly fees of a modest sort – approximately $25-50 per month to your counseling agency for the services they provide related to a DMP.
A reputable credit counselor will make recommendations for you related to controlling your expenses and enhancing income while also offering free educational materials that can further get you on the right track financially. After evaluating your situation, the counselor may offer you a debt management plan that would include a reduction of interest rates and monthly payments on your unsecured debt, subject to the acceptance of your creditors. If you agree to enroll, the duration of the payment schedule will generally be between 36 and 60 months, so this is not something to enter in a half-hearted manner. You must be fully committed to the process of getting out of debt for this to work in the long-run.
Enrolling in a Debt Management Plan
Following enrollment in a DMP, you will begin making regular, pre-determined monthly payments directly to the counseling agency, who will then properly allocate funds to your individual creditors.
In many cases, these payments will be made automatically from your bank account to the counseling agency. This is done in significant part to ensure the timeliness of payments, as late payments to your counseling agency will result directly in late payments to your creditors, damage to your credit score and the possible rescindment of the interest rate and payment concessions included within the DMP, defeating the purpose of setting up the plan in the first place.
You will receive monthly statements from the counseling agency and your creditors, and you should compare them to make certain that there aren’t any material discrepancies and that the counseling agency is properly paying your creditors.
What happens to your credit cards?
Once enrolled in a DMP, all your credit card accounts will be closed (with the possible exception of an “emergency” credit card remaining open) and you will be unable to obtain new credit.
The closing of accounts will have a negative effect on your credit score, though creditors view enrollment in a DMP as a positive development for your credit profile, as your enrollment indicates a willingness to pay your debts.
That said, it would be an extremely bad idea to pursue new credit while enrolled in a DMP, as creditors will become aware of any applications for new credit by simply viewing your credit report. This can result in creditors rescinding interest rate and payment concessions that were put into place through implementation of the DMP.
Just focus on making regular timely payments to your counseling agency and this will ensure the success of your DMP.
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Enrolling in a Debt Management Plan
Following enrollment in a DMP, you will begin making regular, pre-determined monthly payments directly to the counseling agency, who will then properly allocate funds to your individual creditors. In many cases, these payments will be made automatically from your bank account to the counseling agency. This is done in significant part to ensure the timeliness of payments, as late payments to your counseling agency will result directly in late payments to your creditors, damage to your credit score and the possible rescindment of the interest rate and payment concessions included within the DMP, defeating the purpose of setting up the plan in the first place. You will receive monthly statements from the counseling agency and your creditors, and you should compare them to make certain that there aren’t any material discrepancies and that the counseling agency is properly paying your creditors.
What happens to your credit cards?
Once enrolled in a DMP, all your credit card accounts will be closed (with the possible exception of an “emergency” credit card remaining open) and you will be unable to obtain new credit. The closing of accounts will have a negative effect on your credit score, though creditors view enrollment in a DMP as a positive development for your credit profile, as your enrollment indicates a willingness to pay your debts. That said, it would be an extremely bad idea to pursue new credit while enrolled in a DMP, as creditors will become aware of any applications for new credit by simply viewing your credit report. This can result in creditors rescinding interest rate and payment concessions that were put into place through implementation of the DMP. Just focus on making regular timely payments to your counseling agency and this will ensure the success of your DMP.
Why creditors do it and the perk of Debt Management
Creditors make concessions through debt management plans because it allows them to collect on accounts that could otherwise reach charge-off status and become worthless.
Aside from enjoying lower interest rates and monthly payments, you can expect any annoying collection phone calls to become a thing of the past once creditors have received three monthly payments through a DMP.
What’s more, after debts have been paid off through a DMP, creditors often mark debt as “paid in full”. This type of language, if included on a credit report, can help restore a credit score back to health.
Keep in Mind with Debt Management Plans
Only unsecured debts are eligible for consolidation in a Debt Management Plan – secured debts such as mortgages, Federal student loans, home equity lines of credit and auto loans cannot be included in a DMP.
However, credit card debts and medical bills are completely eligible. Remember that you will have to close your credit card accounts, and that your credit score will suffer a moderate negative impact at the outset. By making consistent monthly payments, you can expect a gradual recovery in your credit score, which will be generously rewarded upon full payment of all debts.
For this reason, always make your monthly DMP payments to your counseling agency in a timely manner. If your circumstances worsen while you are enrolled in a DMP, inform your counseling agency and they can work with you to restructure payment levels accordingly.
In a DMP, you don’t have the option to cherry-pick among which unsecured debts you will include – all unsecured debt will likely be accounted for and included in your plan, not just “problem accounts.”
Additionally, remember that this is a long journey, as you can expect the DMP process to take three to five years to complete. However, given the benefits of lower interest rates and lower payments, along with the simplicity of making just one consolidated monthly payment to a reputable credit counseling agency that guides you along each step of the way, debt management plans offer an appealing solution to those heavily burdened by high levels of unsecured debt.
When you consider the rewards of relieving the stress of your debt while strengthening your credit profile and ultimately enjoying the peace of mind of a debt-free lifestyle, travelling the debt management plan road can prove to be a journey well worth taking.
In a DMP, you don’t have the option to cherry-pick among which unsecured debts you will include – all unsecured debt will likely be accounted for and included in your plan, not just “problem accounts.” Additionally, remember that this is a long journey, as you can expect the DMP process to take three to five years to complete. However, given the benefits of lower interest rates and lower payments, along with the simplicity of making just one consolidated monthly payment to a reputable credit counseling agency that guides you along each step of the way, debt management plans offer an appealing solution to those heavily burdened by high levels of unsecured debt. When you consider the rewards of relieving the stress of your debt while strengthening your credit profile and ultimately enjoying the peace of mind of a debt-free lifestyle, travelling the debt management plan road can prove to be a journey well worth taking.
Debt Management FAQ
What is a debt management plan?
A debt management plan (DMP) is a common solution for individuals who are carrying too much unsecured credit card debt and are having difficulty paying bills to a number of different creditors each month. A reputable credit counseling agency can structure a DMP for you in which you make one streamlined payment each month to the counseling agency, who in turn allocates funds to your various creditors. All accounts included in a DMP become inactive, and the closing of these accounts will temporarily negatively impact your credit score. However, a DMP will result in a lower blended monthly interest rate and monthly payment while giving you the opportunity to demonstrate a consistent payment history, rebuild your credit profile and get out of debt over a three- to five-year time period.
Can I have 2 debt management plans?
It is not common for an individual to have more than one debt management plan. In a DMP, the debtor works with a credit counseling agency who has existing relationships with credit card companies and works to negotiate lower interest rates and monthly payments over the life of the plan. Participants are encouraged to include as many accounts that can be brought into the DMP, depending on the individual circumstances associated with each account, the debtor, and the counseling agency relationships. When a debt management plan is comprehensively constructed, there simply isn’t a need for a second DMP.
Does a debt management plan affect your mortgage?
For those individuals with existing mortgages, enrolling in a debt management plan should have little to no consequence. A mortgage payment remains a top priority, and keeping current on payments toward a debt management plan should be considered on equal footing. Both become equally important. For those individuals enrolled in a debt management plan who are pursuing a mortgage or looking to refinance, it can prove difficult to get more attractive interest rates and terms, because the presence of the DMP indicates some degree of credit risk that potential lenders will seek to be compensated for in the form of higher interest expense.
Does a debt management plan affect credit?
Enrolling in a debt management plan generally will not have a negative impact on a credit score. All accounts entered into the plan must be closed, but even these closed accounts can remain on a credit report for up to ten years, resulting in less of an impact in reducing the average age of accounts and lowering a credit score. Closing accounts can lower the total available credit (but not by much if the accounts being closed were already close to “maxed out”) and therefore raise the credit utilization ratio, and this can have a negative effect on a credit score. However, when timely monthly payments are made against the DMP, positive credit history builds, and there generally will be minimal to no negative impact on a credit score as a result of the debt management plan.
How long is a debt management plan?
Debt Management plans typically are designed for three to five year time periods, and this breaks out into anywhere from 36 to 60 months total duration. The DMP is designed to facilitate the complete payment of all unsecured debts included within the program over the designated time frame.
How is debt management different from debt consolidation?
A debt management plan is a structured agreement entered into among multiple parties – the debtor, creditor, and credit counseling service. A properly structured DMP that is overseen by a skilled credit counselor helps debtors get out of debt while assisting creditors in collecting money that is owed to them. It is the responsibility of the debtor to make one timely monthly payment to the counseling agency, who then disburses specified amounts to the individual creditors participating within the plan. Creditors make interest rate concessions through debt management plans that are arranged by counseling agencies because doing so allows creditors to collect on accounts that could otherwise become worthless. Debt Consolidation involves consolidating multiple debts into one single loan, typically resulting in a lower blended monthly interest rate, a lower monthly payment, and lower interest expense over the life of the loan. Debt consolidation does not involve a third-party credit counseling service, and the responsibility is on the debtor to use the proceeds of the debt consolidation loan to pay off the pre-existing unsecured debts, leaving the debt consolidation loan and one monthly payment to pay off in a streamlined, simplified manner.