How a Debt Management Plan Can Help You Get Back on Track
- Debt management plans (DMPs) are offered by credit counseling agencies.
- Credit counselors may be able to reduce the payments or interest rates on your debt.
- You make a payment into the plan each month, and the credit counseling company distributes it to your creditors.
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How much would your life improve if your bills were on track? Less financial stress can benefit you both practically and psychologically. A debt management plan (DMP) helps you reduce your total debt and can increase your credit score. When you complete your DMP, relief is a wonderful feeling.
Learn more from our experts about DMPs and whether this is the right option for you.
What is debt management?
Debt management is a type of repayment plan set up by a credit counseling agency and the creditors to which you owe money. All parties agree to the plan on how the money is paid out. Each month, you deposit money into an account with the credit counselor, and this money goes toward paying your credit card or other unsecured debt, such as medical bills. The DMP continues until your debt is repaid.
If managing your credit card debt is challenging, you are not alone. Consumers added over $1 trillion to overall debt in 2022. That’s an increase of 7 percent over the previous year. While demand for all types of loan grew, the largest increase was in personal loans, where balances grew by 18.3%, and a 16% increase in credit card balances. Those debts are the focus of a DMP.
Signs that you may need debt management help
Feeling overwhelmed about your debts is one sign that you could use a DMP. Does it seem that your balance never decreases, even though you make payments each month? While this is cause for concern, any of the following are red flags:
Making only minimum credit card payments.
Missing credit card payments or frequently making late payments.
Maxing out your credit cards or getting close to the limit.
Using credit cards to pay for daily living expenses.
Charging more on credit cards than you are paying off each month.
Juggling balances and due dates on several credit cards.
Getting calls from creditors.
Perhaps the biggest red flag regarding debt management is realizing you do not know how much you owe.
What is not included in a debt management plan?
Debt management plans generally deal with unsecured loans, such as personal loans or credit cards. Secured loans, such as mortgages and auto loans, do not qualify. Many debt management plans will not deal with student loans, which are unsecured. Unsecured business loans like small business credit cards usually aren’t included either.
Choosing a debt management company
Think hard about choosing a debt management company. Some debt management companies or credit counseling agencies aren’t legitimate and prey on worried people. Your state’s Attorney General, the Better Business Bureau, or your local consumer protection agency can inform you if the debt management companies you are considering have any complaints against them.
Avoid debt management companies that want you to pay prior to providing any services. A company that claims to guarantee a specific credit score increase or removal of accurate but negative current information in your credit report is another red flag.
The debt management company should always send you free information about its services and programs. If the company will not do that without requiring extensive information about your finances, look elsewhere.
Find a debt management company whose credit counselors are certified or accredited by an outside organization, such as the National Foundation for Credit Counseling.
Questions to ask a debt management company
When choosing a debt management company, you need to ask the right questions before signing up. Here are some important questions to ask.
What services do you offer?
Because everyone’s circumstances are different, you want a debt management company offering at least these services:
Budget counseling to help you stay on track.
Debt management to negotiate with your lenders for lower interest rates or balances.
Money management to make sure you’re able to make your payments.
Consumer credit to help you build up your credit score.
If a company wants you to sign up for a DMP without truly analyzing your financial situation, that’s another red flag.
Are you licensed to offer services in my state?
Many states require credit counseling agencies to register or obtain licenses before offering services. Do not consider any organization that is not licensed to do business in your state. Being told a license is pending is not good enough.
Find out if the organization is licensed by checking out the U.S. Trustee Program’s list of approved credit counseling agencies.
Will I have a formal contract with you?
This is a must. Lawyers like to joke that a verbal agreement is not worth the paper it's written on. Get everything you’re told in writing, and read the document carefully before signing anything. If you have any questions about the agreement, make sure you’re comfortable with the answers before signing any contract.
What are your counselors’ qualifications?
You want counselors certified or accredited by outside organizations. If someone says that counselors are certified, ask which organizations accredited or certified them.
What are the fees?
When it comes to fees, find out exactly how they work and what is covered and why. Transparent fees make sure you are not surprised by any hidden charges.
How long have you been in business?
The longer a company has been in business, the more likely it is to be providing valuable service. Those companies have a track record you can verify. You don’t want to get involved with a fly-by-night operation.
Is debt management right for you?
A DMP is not for everyone. If you have secured debt or student loans, a DMP may not offer much help. However, if you have unsecured debt and can commit to the DMP, it can be a good option. The payments are significant, and some people end up leaving the DMP because they cannot make the monthly payment.
Because creditors want full payment, the organization must convince them that you cannot make regular payment based on the original credit terms.
Along with debt management, you should receive some financial lessons from the agency. Many borrowers don’t have adequate personal finance training, which contributes to debt issues. Better budgeting and financial management skills can have a big impact on your life going forward.
If creditors are constantly calling and harassing you, after beginning a DMP those calls should cease once all the paperwork is processed.
A DMP can prevent bankruptcy or defaulting on your debts and the resulting negative impact.
How debt management works
Get started with a financial counseling session in which the counselor goes over your finances with a fine-tooth comb. The counselor reviews your budget, debts, and financial goals.
Creditors may agree to waive certain fees or lower monthly payments when you enroll in a DMP. Your counselor may work with your creditors to lower the interest rate on your debts. This enables more of your payment to go towards getting you debt-free.
Once enrolled in a DMP, you deposit a set payment each month with the credit counseling agency, which sends the funds to your creditors. As long as you keep making the payments, your debt is usually paid off within three to five years.
Finding the right debt relief option for you
Whether you choose debt management, debt settlement, or some other type of solution, the sooner you get started the sooner you’ll be out of debt. Freedom Debt Relief will help you fully understand your options for dealing with your debt, including our debt relief program. Our Certified Debt Consultants can help put you on the path to a better financial future by helping you choose the best option. Find out if you qualify right now.
Will debt management hurt my credit score?
A DMP should not hurt your credit score. While your credit report will reflect that you are enrolled in a DMP, FICO does not use this information for credit score determination.
In fact, it is possible that enrolling in a DMP can improve your credit score. First, if the amount of debt you owe goes down, that can help since it makes up 30% of a FICO score. Even more importantly, a timely payment history makes up 35% of your credit score and a DMP can increase your on-time payment rate.
Can I still use my credit cards while on a debt management program?
You will have to close credit cards included in your DMP. Because your creditors may monitor your credit reports, they may not allow you to use credit cards that are not part of your DMP.
When you’re in a DMP, you’ll usually have less access to credit. Your credit counselor can explain how that will affect your finances while in the plan.
How do I choose a reputable debt management company?
Look for a debt management company that is a member of either the National Foundation for Credit Counseling or the Financial Counseling Association of America. Such membership indicates that it adheres to industry standards and best practices.