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Plans Work?
For individuals burdened with high levels of unsecured debt, enrolling in a Debt Management Plan (DMP) can prove highly beneficial. A 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 and make multiple monthly payments to a variety of different creditors, a DMP allows you to make one streamlined payment to your counseling agency, who then submits appropriate disbursements to creditors according to the terms structured in the DMP. Why do creditors allow for such concessions? Because a DMP allows banks to collect on accounts that might otherwise reach charge-off status and become worthless to them.
Get The Ball Rolling With a Reputable Credit Counseling Agency
Begin by choosing a reputable counseling agency staffed with certified counselors who are trained in debt management. Be prepared to discuss specifics related to your income and expenses. In other words, know exactly how much money you have left over at the end of the month after accounting for basic necessities such as rent, food, transportation, utility bills, etc. You should also be able to discuss a clear picture of your unsecured debt situation. Therefore, you should know exactly 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 personal financial obligations. These debts will all be discussed in an interview with your credit counselor, who will refer to your credit report to verify that all of the information you provide is accurate.
A reputable credit counselor will make recommendations 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 can offer you a debt management plan that includes a reduction of interest rates and monthly payments on your unsecured debts – 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. Most counseling agencies charge a one-time enrollment fee and regular monthly fees of approximately $50 per month for services related to a DMP.
I've Just Enrolled in a Debt Management Plan. What Happens Next?
Following enrollment in a DMP, you begin making consistent monthly payments directly to the counseling agency, who properly allocates funds to your creditors. Your payment will be conducted automatically and electronically, directly from your bank account to the counseling agency, to ensure timely payments to your creditors. You receive monthly statements from the counseling agency and your creditors and compare them for accuracy. Aside from the benefits of lower interest rates and monthly payments, you can expect annoying collections-related phone calls to fade into memory.
Meantime, all of your credit card accounts will get closed (with the possible exception of an “emergency” credit card remaining open) and you won’t be able to obtain new credit. Initially, your closed accounts will have a slight negative effect upon your credit score, although creditors do view enrollment as a willingness to pay off your debts.
However, it would be a terrible idea to pursue new credit while enrolled in a DMP, as creditors can learn of any applications for new credit by viewing your credit report and rescind the benefits that were put into place through the DMP. Instead, just focus on making regular timely payments to your counseling agency for the duration of the plan.
Remember, only unsecured debts are eligible for inclusion in a Debt Management Plan – in other words, secured debts such as mortgages, Federal student loans, home equity lines of credit and auto loans cannot be consolidated into a DMP. However, credit card debts, personal loans and medical bills are all eligible. Also, you don’t have the option to cherry-pick among which unsecured debts you include – all eligible unsecured debt will likely be accounted for and included in your plan, not just your “problem accounts.”
Stick to Your Debt Management Plan
As you make consistent monthly payments, you can expect a gradual recovery in your credit score, which will eventually 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 change for the worse while you’re enrolled in a DMP, just inform your counseling agency and they can work with you to restructure payment levels accordingly.
You should expect the debt management plan 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, debt management plans offer an appealing solution to the problem of excessive unsecured debt. Imagine relieving the stress of your debt burden while strengthening your credit profile and ultimately enjoying the peace of mind of a debt-free lifestyle. These are the benefits you can look forward to when you complete a debt management plan.