What Is a Debt Management Plan and Is It Right for You?

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Are you struggling under a mountain of debt? Is it difficult to meet your monthly loan or credit card payments? Are collection agencies constantly calling you? If this sounds like you, you may want to explore a debt management plan. Depending on your situation, it could be the relief you need to help you get back on track. 

What Is a Debt Management Plan?

A debt management plan (DMP) is a voluntary agreement between you and your creditors that can lower your interest rates and monthly payments. You arrange a debt management plan through a credit counseling agency, which negotiates the agreement with your lenders on your behalf. The agency will collect one payment from you each month and then disburse the money to these lenders.

Debt management plans are only for revolving or installment debt like credit card debt and personal loan debt that is unsecured. You can’t use them for mortgage loans, auto loans or anything else secured by collateral.

Is a Debt Management Plan Right for Me?

To determine if a debt management plan is right for you, first, contact a non-profit credit counseling agency. The National Foundation for Credit Counseling or the Financial Counseling Association of America can refer you to an affiliated non-profit credit counselor near you. The Department of Justice also has a list of accredited credit counseling agencies, arranged state by state.

Meeting with a credit counselor will help you budget your income and expenses and get advice on your debt. Be honest with the counselor about your amount of debt, creditors, assets, income, and monthly expenditures. 

If a debt management plan makes sense, the credit counselor will negotiate with your creditors. While the counselor usually doesn’t try to reduce what you owe, he or she may be able to lower your interest rates, waive fees, or reduce your monthly payments by extending how long you’ll be making them. 

Debt management plans typically require you to make payments for three to five years. You’ll likely have to agree to stop using or close your credit cards, and you won’t be able to get new credit while your plan is in place.

Don’t confuse a debt management plan with a debt settlement option. With debt settlement, you negotiate to pay a lesser amount than you owe. In other words, some of the debt is forgiven. While this may sound like a great option, debt settlement will lower your credit score, and there are other drawbacks.

Debt consolidation is also different. This involves getting a new consolidation loan or balance transfer credit card to consolidate all your existing balances, ideally at a lower interest rate. You’ll need a good credit score to secure a decent rate.

Debt settlement companies are different from nonprofit credit counseling agencies. Avoid debt settlement companies that charge fees up-front or tell you to stop communicating with your lenders. 

Benefits of a Debt Management Plan

  • You’ll be less stressed. Besides potentially saving you money on interest and making your payments more affordable, there’s just one payment to remember each month. You’ll get relief from collection calls and letters and know there’s an end-point to your financial instability. 
  • You’ve got built-in discipline. Since you can’t use credit, it should be easier to stay on track. (With debt consolidation, by contrast, you may be tempted to start using some of the credit cards you’ve paid off with your new loan.) 
  • Your credit score isn’t as vulnerable. As long as you make your payments on the debt management plan on time, your credit score won’t take the hit it would if you opted for debt settlement or bankruptcy.  In fact, it’s not clear whether there will be any negative impact on your score. 

While your debt management plan will be noted in your credit report, it’s not calculated into your FICO credit score. What may hurt your score is closing accounts to satisfy the plan agreement. Then again, making timely payments may counteract the damage. 

Disadvantages of a Debt Management Plan

  • You need to be vigilant. Since you’re using a middleman, some things can get lost in translation. It’s best to verify that your creditors are actually making the concessions you think they are. And you should make sure your credit counselor is making all the promised payments on time. 
  • You can’t count on lower interest rates. There is no guarantee that the credit counselor can get your interest rate reduced. 
  • Missed payments are damaging. If you miss a payment on your debt management plan, it could derail the entire plan. And creditors may be less willing to negotiate terms you’ll like if you try to enter into a new plan.

Bottom Line

A debt management plan is worth considering if you are deeply in debt and want to turn things around with little if any, damage to your credit score. It’s not to be entered into lightly, though. Be prepared to be disciplined about making your payments and live without credit for as many as five years.

Article Sources

  1. National Foundation for Credit Counseling: Debt Management Plans

  2. Consumer Financial Protection Bureau: How to Get a Handle on Debt

  3. Experian Information Solutions: A Debt Management Plan: Is It Right for You?

  4. Experian Information Solutions: Will Debt Relief Hurt My Credit Score?

  5. Experian Information Solutions: How to Get a Debt Consolidation Loan

  6. Federal Trade Commission, Consumer Information: Coping With Debt

  7. Federal Trade Commission: FTC Facts for Consumers