What’s a Debt Management Plan?
Debt management plans provide individuals with the help they need to get out of debt. There are numerous types of methods to get out of debt. However, with this method you will be incorporating the help of a third party. With a debt management plan, you plan a method of getting out of debt over a period of two to four years. In general, you will work with a consumer credit counseling company to create this type of plan. It is important to understand how it works before you enter into the agreement.
What is a DMP?
A debt counseling company is a third party organization. Some of these programs are run by nonprofit organizations. Others are run by for profit organizations. In either case, you will pay a fee for the service, but the fee is generally low. It is important to consider agencies carefully since some companies are less than able to provide you with the help you need. Before you work with the company, know the following.
- Ask what the fees are for the service. Expect a monthly fee for using the service, even at nonprofit locations. This covers their administration fees.
- Find out what type of working relationship the organization has with your lenders. This relationship can help you to get better discounts and terms.
- Check the Better Business Bureau and find out if the company has a good rating. You will want to work with a company that has a good reputation.
- Do not work with any company that promises to wipe out your debt, take things off your credit report or gets you out of debt in a few months (unless you have a small amount of debt to repay.)
These things can help ensure that you are able to work with a trusted company. However, it is also important to realize that these companies do offer different services. You should talk to a few to find out which one can meet your needs overall.
How it Works
How does a debt management plan or DMP come about? Under this plan, you will be spending time repaying your creditors, but the plan makes it easier for you to do so. Here is a breakdown of what is likely to happen.
You meet with the counselor and discuss your debts. At this meeting, you also work out a monthly budget. The monthly budget allows you to know how much money you have coming in, what your monthly expenses are, and how much is left over to pay towards your debt each month. It is critical to know how much you can pay towards your lenders through the DMP.
With this information, the counselor is then able to contact each one of your credit card and other debt lenders and to work out a payment arrangement. In general, the company will try to work out an agreement with each lender. That agreement may include any of the following.
- A way to freeze the amount you owe so that no additional interest and fees build
- Reduce what you owe overall
- Reduce your interest rate on the loan
- Or, reduce your monthly payment
The counselor will talk to each one of your lenders to determine what the best payment arrangements are. The lender must agree, and they do not always do agree. Many lenders do agree to work with you through this plan because they believe it is the last stop on the way to bankruptcy. If you cannot do this, you may decide to file bankruptcy in which case the lender will end up getting even less.
Setting Up Your Debt Management Plan
Once an agreement is made with each of your lenders, the next step in the process is to set up the account for you. This finalization of the debt management plan puts the event into motion.
- You will make a monthly payment to the debt counselor. That will include the amount being paid to your lenders and the fee for the service.
- The debt counselor will then pay each of the lenders directly for you.
- The process continues month after month until you pay off your debt with your lenders. In most cases, this will take about three years, though it may be less if you can pay off your debt sooner.
The benefits of using this service are numerous. You will be making regular payments to your lenders, which will help to improve your relationship with them. While it may initially cause a negative reaction on your credit report since you will be paying less than what you owe to your lenders, it can still help you to get the debt paid off. In the end, this is better. More so, it is less of a negative impact than filing for bankruptcy is.
Can You Do It?
The key thing to this type of plan is making a decision to go ahead with it. If you do get out of the debt management plan because you are no longer making your monthly payment, this can lead to a negative impact on your credit report. More so, the lender can come after you for full payment of what you owe, including fees, interest and any forgiven debt under the plan. If you believe you can make these payments, use this method to get out of debt.
A debt management plan can be hard to follow if you do not have steady income. However, it does put in place a way for you finally to dig yourself out of debt. It can take time to get to that point, and your available credit in the meantime will be less, since these accounts are frozen, but it can reduce what you have to pay to your lenders in the long term. This can greatly boost your ability to get out of debt faster. Take into consideration if a DMP can work for you. Then, talk to a counselor.