Debt Management Plans

If you have a lot of debt with a lot of creditors and find that managing it has become increasingly difficult, you may be just the right candidate for a debt management plan.

With a debt management plan, several debts are compiled into a single monthly payment at a reduced interest rate. A debt management plan can cut the interest rate on your debt down to one half or even one third its original amount.

Debt management is distinct from debt consolidation in that your debts remain with the same creditors. With debt management, your creditors have simply agreed to offer you a lower interest rate in exchange for a commitment to a repayment plan. With debt consolidation, your original debts are paid off to those particular creditors, the accounts are closed and you make your single payment to your new creditor. The account you make your monthly payment to is an escrow account used to make the required payments on your behalf to your respective creditors. The typical debt management plan aims to get you debt-free in three to five years.

Pros and Cons of Debt Management Plans

There are advantages and disadvantages to debt management plans, some universal and some depending on your circumstances. The advantages of debt management plans include the following:

  • They can lower your interest rate by as much as two-thirds and can lower certain fees, as well.
  • They make repaying your debts simpler by rolling them into a single, more manageable payment.
  • They can help you pay off your debt faster.

The drawbacks of debt management plans include the following:

  • They are not useful for many other types of debt besides credit card debt. For example, debt management plans cannot generally be used to pay down student loans, tax debt or medical debt.
  • If you miss a payment while in a debt management plan, you could get disqualified from the plan and be forced to return to the original interest rates and repayment terms of the debts.
  • During the standard three- to five-year repayment period under a debt management plan, you will likely be prohibited from using credit cards or opening any new lines of credit.

How to Know If a Debt Management Plan is Right for You

Only around 10 to 20 percent of credit counseling clients end up implementing a debt management plan. The reason is simple: it is not right for everyone. Consider that of those 10 to 20 percent of credit counseling clients who initiate a debt management plan, between 30 and 50 percent of them fail to complete the plan. If the following applies to you, then a debt management plan may be worth considering:

  • Your personal debt is from 15 to 49 percent of your yearly income.
  • Your income is steady enough that you believe you could pay your debt off in five years if your interest rate were lower.
  • If you were to start a debt management plan, you are confident you would not need to open any new lines of credit until the plan was completed.

How to Set Up a Debt Management Plan

To arrange a debt management plan, you would speak with a credit counselor at a nonprofit credit counseling agency. Do not attempt to set up a debt management plan on your own. A nonprofit credit counseling service will help you set up the right plan for you and set it up properly. Just be sure the credit counselor you use is certified and accredited. While you are implementing your debt management plan, your credit counselor can assist you further by helping you to craft a budget and teaching you the money management and personal finance skills needed to adhere to it.

Nonprofit credit counseling agencies do not charge for credit counseling services. However, there may be a charge imposed for setting up and maintaining the escrow account from which your debts will be paid. As of June 2018, non-profit debt management plan fees average $33 to $42 to start and $19 to $30 per month to maintain.

Beware of Debt Management Plan Scams

The U.S. Federal Trade Commission (FTC) warns that some credit counseling organizations offering debt management plans may be deceiving and defrauding consumers. Some such organizations charge customers high fees for debt management plan services or push so-called voluntary contributions, which could put you at further risk of default or sliding deeper into debt. Many organizations mislead customers into believing debt management is their only solution. Oftentimes, these organizations do so before knowing a consumer’s unique situation and without providing any useful education resources or counseling.

 

You should always check the certifications and accreditations of any credit counseling agency before you let them help you and, certainly, before you give them any money. Consider only nonprofit credit counseling agencies, as they are more likely to have your best interests in mind. Still, other credit counseling organizations misrepresent themselves as legitimate nonprofit organizations or have obtained their nonprofit status through fraudulent means. They accomplish this by misrepresenting their practices to credit regulators. If you sign up for a debt management plan, contact your respective creditors individually to confirm they have agreed to the plan as presented to you before you start making payments under its terms.

Debt Management Plan Tips

The following are some tips to help you find the greatest success using a debt management plan to free yourself from debt:

  • If you are unable to make a payment on time, contact the organization managing your debt management plan immediately to notify it and make arrangements.
  • Read your monthly statements closely to make sure your payments are going to the creditors you intended, as per your plan.
  • Always make all your payments on time.

Keep in mind that if you do not make your payments on time according to the agreement in your debt management plan, you could lose that plan and go back to your former debt repayment status and arrangements.

 

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