Debt Management Overview

What are Debt Management Plans & credit counseling?

A Debt Management Plan (DMP) is a sponsored repayment plan negotiated for you by a non-profit credit counseling agency. The agency works on your behalf to reduce the interest rates on your personal loans and credit card accounts, and create a payment plan. This plan will require fixed monthly payments for a maximum of five years.

Are Debt Management Plans right for you?

If you are finding it challenging to make a dent in your debt because you have high interest rates on your credit cards and/or loans, a DMP may be an option for you. However, this plan may not work for you if you don’t have steady income. The DMP will have fixed monthly payments for up to five years. Missing even one payment could nullify the plan and result in your interest rates returning to their higher levels.

Debt management FAQs

  • Can I arrange my own DMP? You cannot arrange a DMP on your own. You must use a credit counseling agency licensed in your state. However, you can contact your creditors individually to see if they offer hardship plans.
  • What does a DMP cost? Cost for this service generally ranges from 1.7 to 2.5 percent of the total balances of your enrolled accounts. These plans are highly regulated, so fees vary by state. A certain percentage of people enrolled in a DMP will not pay a fee.
  • Will I save money with a DMP? On average, your interest rate for credit cards and bank loans is reduced to 6%, which results in lower monthly payments.
  • How long is a DMP? The DMP generally lasts four to five years and cannot exceed 60 months.
  • How is my credit score impacted?
    • Your credit score should not be impacted by participation in a DMP. If you have late payments prior to your DMP, those have already had a negative impact.
    • While your utilization should come down, which can help your credit score, because your accounts in the plan typically get closed, you will lose some “account type” diversity. This can be replaced later.
    • Because your accounts enrolled in the plan are closed this impacts your age of credit. However, you can later be added to someone else’s accounts as an authorized user and their age of credit will be transferred to you.
  • What will appear on my credit reports? Positive, closed accounts will show on your credit reports after you complete your DMP.
  • When can I get a loan or a new credit card? You can apply for student loans, mortgages and car loans while in a DMP, but we recommend waiting until after completing your DMP to apply for new credit cards or other unsecured debt.

Alternatives to debt management

There are other options to resolving your debt. You may want to consider a debt settlement plan, debt consolidation or filing bankruptcy. You can also contact your creditors individually to see if they offer hardship plans.

Debt management pros & cons: Comparison to other debt resolution plans

Pros
Cons
Debt Management
On average, your interest rate for credit cards and bank loans is reduced to 6%; resulting in lower monthly payments.
They’re rigid and inflexible. If you miss a payment, the plan is typically over.
It may be more affordable and have a fixed pay-off time of 60 months or less.
You’ll need steady income as these plans last 4-5 years with fixed monthly payments.
It doesn’t impact your credit score.
Accounts enrolled in the plan will be closed, which impacts your age of credit.
You won’t deal with collectors.
You won’t be sued.
Debt Settlement
You’ll likely pay less and get out of debt faster.
You must have the money to pay off the debt at the negotiated amount.
If you’ve missed payments with your creditor, and are in collections, settling will eventually help your credit.
Your credit score temporarily drops, if it has not already, due to late payments.
It can improve your financial situation.
Taxes may apply to the amount of debt forgiven in your settlements.
It can help you avoid being sued if you’re already in collections.
Your account will be subjected to internal/external collections, which could include being sued.
It can help you move on to accomplish other financial goals as you can apply for credit cards, loans, and mortgages after your last settlement payment.
Once you’re committed to a Debt Settlement Agreement, you can’t miss a scheduled payment as you’ll risk nullifying the agreement.
Bankruptcy
No impact to your taxes.
For a time, bankruptcy impacts your credit. Chapter 7 Bankruptcy stays on your credit report for 10 years and Chapter 13 for seven years.
Usually this is the lower cost option; especially Chapter 7 Bankruptcy.
Historically, most people who file Chapter 13 risk not completing it, which wastes money and time.
Chapter 7 is the fastest way out of debt. You can start rebuilding your credit right away.
It may impact your immediate financial goals. Chapter 13 takes three to five years to complete.
You’re under court protection, which eliminates judgments, liens and wage garnishments, and stops all collections; even a foreclosure.
It’s public. This can impact people who work in financial services or a field that requires a very clean background check.
Debt Consolidation
You may get a lower interest rate that applies to all of your debt.
Depending on the loan terms, you could pay more interest across the life of the loan.
You may pay off your debt sooner.
You could get extended payment terms keeping you in debt longer.
Having one payment each month may make it easier to keep track of and pay on time.
You may get an introductory interest rate that could increase, which has a greater impact since all of your debt is now under this rate.
Some companies may offer too-good-to-be-true programs so caution is necessary.

How to get started

Start by assessing the amount and type of debt you have. You can use this tool to help you assess if you have too much. You can determine how long it will take to pay off your current credit card balance with this credit card payment calculator. Then do a quick check of the savings you may get on your unsecured debt with this debt management calculator. If you’re then convinced that a DMP is the right option for you, you’ll need to contact a licensed credit counseling agency in your state.

These agencies should have counselors certified and trained in consumer credit, money and debt management, and budgeting. The FTC cautions consumers to avoid agencies that won’t provide free information about their services without requiring that you provide information about your situation. Once you identify some potential agencies, you can check to see if there are any complaints against them with your state Attorney General and local consumer protection agency. The FTC recommends that you then narrow your list to a few companies you will interview to make your final selection. Some of their recommended interview questions include:

  • What are our services?
  • What free educational materials are available?
  • Will you help me resolve my current problem and help me develop a plan to avoid future problems?
  • What are your fees, including set-up or monthly fees?
  • Can I get a quote in writing?
  • What if I can’t afford to pay your fees or make contributions?
  • Will you provide a formal written agreement or contract?
  • Are you licensed to offer your services in my state?
  • What are the qualifications of your counselors? How are they certified and trained?
  • How will you secure my personal information?
  • How are your employees paid?

The FTC’s Consumer Information website provides a detailed list of questions.

Resources:

Questions to ask a credit counseling agency — This FTC article includes a list of questions that can help you select the right credit counseling agency.

Debt management calculator – This calculator can help you calculate the savings you may get on your unsecured debt with a DMP.

Assess your debt – Helps you answer the question, “Do I have too much debt?”

Debt settlement agreement – Build the contract for your settlement documenting the criteria you negotiate with your creditor.

Debt consolidation calculator – Assess if debt consolidation is a viable option for you.

Credit card payment calculator – Discover how long it will take to pay off your current credit card balance.

Why Resolve?

If you’d like to consider all of your options, Resolve is here to help. Although Resolve is not a credit counseling agency, we can assess your situation and show you your options for paying off your debt, including a DMP, if appropriate. Our Resolve platform and debt guidance are free. You can review and compare debt relief paths and ask our experts questions without cost. If you then choose to work with one of our Resolve Network Partners, we would inform you of the fee for their service.  

Your first step is to complete your profile here. Then our system will determine if credit counseling may be a good option for you and will point you in the right direction for next steps. We’re also happy to speak with you to discuss your situation further. Just send us a message.

 

 
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