A large number of people in the United States have an overwhelming amount of debt and have trouble making consistent payments. Individuals with considerable amounts of debt are often in need of debt relief services, and finding the right one can be difficult. There are many debt relief programs available, but not all programs are suitable for every financial circumstance. An alternative to debt settlement or consolidation companies is a credit-counseling agency.
Nonprofit credit counseling agencies offer free or low-cost programs to help individuals gain a better grasp of their financial situation and develop a plan to get out of debt. One of the strategies credit counselors might recommend to clients that have certain consumer debts is the debt management plan. Under this plan, the credit counseling agency works with a client’s creditors to help establish a manageable payment plan and possibly negotiate lower interest rates. Learn more about debt management plans by reviewing the sections below.
What is a debt management plan?
Organized by a credit counselor, debt management plans help individuals that have consumer debts and are having trouble making monthly payments. Under a debt management plan, credit counseling agencies work with clients and their creditors to gather debts into one payment and negotiate a payment plan. Often, the payment plan negotiations include the lowering of interest rates. This makes it easier for the client to afford their monthly payments, while saving time and money.
When a debt management plan is set up, clients make the agreed upon monthly payment to the credit counseling agency, and the organization in turn pays the client’s creditors. Negotiated payment schedules typically last between three and five years. Certain debts, such as student loans and medical bills, are not eligible for payment under debt management plans.
Unlike most other debt relief services, debt management plans are offered by nonprofit credit counseling agencies that are accredited and certified by organizations such as the National Foundation for Credit Counseling. While the initial consultation with a credit counselor is free, debt management plans do involve fees in addition to the monthly payment, but fees are no more than $50 per month. In situations where the client is unable to these fees due to financial hardship, the fee may be lowered or waived.
Factors to Consider About Debt Management Plans
Debt management plans have benefits as well as risks, and may not be the best option for everyone. There are several facts to consider before choosing a debt management plan as a solution for debt relief. However, those seeking a debt management plan are not alone in the decision-making process, as credit counselors always review a client’s financial situation thoroughly before offering advice and recommending the plan.
The benefits that debt management plans provide can help an individual manage their debts effectively. Credit counselors work with a client’s creditors to lower their interest rates, usually by at least half. This makes monthly payments lower and more manageable. Clients also make a single monthly payment to their credit counseling agency, rather than making payments to multiple creditors. Debt management plans also take less time than paying off debt alone or through other debt relief methods.
Although these plans can be advantageous for many, there are some drawbacks to consider before making a final decision. Some of the more negative aspects of debt management plans (DMPs) are:
- DMPs only cover certain debts: Debt management plans are used mostly for credit card debt. They cannot be used to pay off medical debt or student loans.
- No new credit lines: While on the payment plan, clients are generally unable to use the credit cards they are paying off or open new lines of credit.
- Strict payment schedule: Payments need to be made monthly and on time when on a debt management plan. Missing a payment can terminate the program, meaning interest rate cuts end and credit scores may be damaged.
Ideal Debt Management Plan Customers
Debt management plans help individuals who are have consumer debts, such as credit card debt, and have trouble making monthly payments. These plans do not work for those who have an overwhelming amount of debt that cannot be paid off within five years, or those who have smaller amounts of debt that can be managed without the help of an agency.
When considering a debt management plan, the best way to be sure it is a good fit is through a nonprofit credit counseling agency. Credit counselors review their client’s financial situation before offering advice, and only suggest debt management plans when it is the right option for the client. Typically, debt management plans are recommended for:
- A debt owed between 15 and 49 percent of the annual income.
- Those with a steady income and can pay off debts within five years with a lower interest rate.
- Those who will not need to open new lines of credit to make ends meet.
Alternatives to Debt Management Plans
Although debt management plans are a great debt relief solution for many, they may not be right for everyone. Debt management plans do not cover all kinds of debt, so those that need help with student loan debt, medical bills or taxes owed will need to choose another debt solution. Those with much larger or much smaller amounts of debt should also consider other debt relief solutions if they do not qualify for a debt management plan. There are alternative debt relief methods that are worth considering, such as:
- DIY methods – If the consumer debt owed is less than 15 percent of your annual income, consider a do-it-yourself debt relief method, such as the debt avalanche.
- Debt consolidation – Similar to debt management plans, debt consolidation loans help consumers reduce their monthly payments down to a single bill. However, this method involves taking out a loan to pay off the existing debt.
- Bankruptcy – If your debt is greater than 50 percent of your annual income and cannot be paid off within 5 years, bankruptcy might be a better option for you. It clears debts and allows for a fresh start. Though it can damage your credit score, it allows for rebuilding within 6 months of filing.
By Alfred Wickham –