What is a debt management plan?
Written for ConsumerAffairs, original publication
A debt management plan is a repayment plan set up through a credit counseling agency that groups all your debts and lets you make one monthly payment. Depending on the amount of money you owe, a debt management plan could help you get out of debt in as little as three years. Here’s everything you need to know about a debt management plan before deciding if it’s the right choice.
How do debt management plans work?
A debt management plan (DMP) is a repayment schedule created by a credit counselor to help an individual with debt. Debt management plans can help you avoid certain fees associated with your normal payments and possibly lower the interest rates on your debts. While credit counseling services are always free, debt management programs require payment, usually in the form of setup costs and monthly fees.
Debt management plans generally last three to five years, depending on your income and amount of debt. With a debt management plan, you make monthly payments to the credit counseling agency administering the plan. The company then submits payments to your creditors on your behalf.
Debt management programs pros and cons
A debt management program isn’t always the best solution for someone struggling with credit card debt. Keep reading for a full overview of the pros and cons associated with debt management plans.
Benefits of a debt management plan
There are many benefits to a debt management plan, including the ability to:
Pay off debt faster than you could on your own.
You make the same monthly payments throughout the entire course of a debt management plan, so your payments go toward your other outstanding balances once one account is paid off.Combine all debts into one payment each month.
Participating in a debt management program lets you pay off debt faster by rolling multiple outstanding debts into one payment instead of paying off one account at a time.Lower interest payments.
Lenders want you to pay just as much as you want to be debt-free, so it’s possible that a credit counselor can negotiate a lower interest rate with lenders so they’re getting the amount you owe but at a lower interest rate.Send collections calls to your counseling agency.
A major benefit of debt management plans is that you can direct collections calls to the counseling agency — you won’t have to deal with pesky collections agents.
Disadvantages of a debt management plan
Some disadvantages of debt management plans include:
Debt management plans can only be used on certain kinds of debt.
Debt management solutions are designed for certain unsecured liabilities, such as credit card debt. If you’re struggling with student loans, tax debt or medical debt, a different debt relief option might be better.You shouldn't use credit during the plan.
Debt management plans last anywhere from three to five years. Using more credit during this time extends the duration of the program by increasing your debt. If you depend on credit to make ends meet, a debt management plan may not be the right solution.Missing a payment could hurt.
If you’ve negotiated lower interest rates on loans, missing a payment during your debt management plan might result in your lender increasing rates.
Does a debt management plan hurt your credit?
It’s difficult to predict the effect of a debt management plan on your credit rating. The three major credit bureaus note on your credit report that you enrolled in a debt management plan, but this isn’t factored into your credit score.
Since debt management plans involve paying off and closing accounts, there’s a chance that your credit rating will drop a few points during the program — however, making on-time payments, lowering your credit utilization ratio and establishing trust with creditors helps build a better credit score over time. Once you’ve paid off your debt, expect to see a noticeable improvement in your credit score.
Debt management isn’t the only debt relief option worth looking into, especially if your financial situation doesn’t qualify. Check out our resources on debt settlement and debt consolidation to see if these options are better for you.
Debt management plan FAQs
Can creditors refuse a debt management plan?
Yes, creditors can refuse a debt management plan, but it’s unlikely. Debt management plans benefit both the creditor and borrower by ensuring that the creditor gets its funds back and the borrower can afford payments.
Can I keep my car on a debt management plan?
Yes, you can keep your car on a debt management plan. Because debt management plans only deal with unsecured debt, creditors probably won’t be interested in repossessing your vehicle.
Can you pay off a debt management plan early?
Yes, most debt management companies let you pay off a debt management plan early. Make sure to ask the credit counseling agency if there are any prepayment fees associated with its plans.
Will a DMP stop me from renting?
Legally, there’s nothing stopping you from entering a rental agreement while completing a debt management plan, but it could cause a landlord to question your reliability. If a landlord checks your credit, they can see that you’re on a debt management plan, which may create doubts about your ability to pay rent consistently.
Can I get a credit card while on a debt management plan?
You might be able to get a credit card while on a debt management plan, but it’s highly discouraged. The point of a debt management program is to decrease your credit card debt, so creditors lose trust in you and might even raise your interest rates if you continue to rack up credit card bills while in the program.
Bottom line: Is debt management a good idea?
Debt management plans have many benefits, but it’s crucial to consider all ramifications carefully before signing up. Make sure you’re working with a trustworthy credit counselor that has a high percentage of completions and solid reviews. Take time to research and ask plenty of questions before committing to a program.