If you’re struggling with mounting debt you probably already know the challenges that high interest rates and missed payment fees can present. In fact, if you’re making just the minimum payments on your credit cards, it could take you up to 20 years (depending on your balances and annual percentage rates) to wipe out that debt. And that’s if you don’t continue to use those cards for new purchases.
If that’s the situation you find yourself in, you do have some options. Debt management may be one of them if you have consistent income and, ideally, a bit of money in savings. In fact, this debt relief option could get you out of debt within five years or less. Here’s how it works:
What is a debt management plan?
A debt management plan (DMP) is a sponsored repayment plan negotiated for you by a credit counseling agency. The agency works on your behalf to reduce the interest rates on your unsecured debts – such as personal loans and credit card accounts – and creates a payment plan.
Most DMPs require that you make fixed monthly payments for up to five years. You’ll make one monthly payment to the agency and they will then distribute that to each of your creditors included in the plan. Your monthly payment will also include a small fee for the agency’s services. Working through the agency, your monthly DMP payment will range between 1.7 and 2.5 percent of the balances enrolled in the plan.
Why is debt management important?
Debt management provides a way for a consumer with regular income to meet their debt obligations within five years and can be a better option than other forms of debt relief. Michael Bovee, co-founder of Resolve, said some people find it a much better option than debt settlement.
“Last week, I talked with a woman who had already spoken with a couple of debt settlement companies,” he said. “The quotes she received would lead to her paying back around 80 percent of her debt over four years.”
It turns out not an insignificant portion of that amount was due to high fees charged by the debt settlement company.
“But then I walked her through the fact that she would likely owe taxes on the forgiven portion of her debts,” Bovee said. “Now she was looking at having to pay close to all of today’s balances when everything was said and done.
“And because debt settlement companies typically do not make a comparison of what a DMP would look like next to the program they are offering, she did not know she could do a DMP at close to the same cost over all, and experience none of the debt collection anxiety, and not even impair her credit scores as she was still current on her credit cards.”
How does a debt management plan affect my credit?
Compared to other debt relief options, debt management doesn’t really impair your credit. There may even be some positive impact. For example, your credit utilization (the total amount of your credit limit being used) will come down as you begin to pay off your debt, which can help your score. If you’re behind on any payments, those too will weigh less and less on your credit scores as you continue to post timely payments.
Keep in mind that any accounts included in your DMP will be closed and your credit report will indicate that they are part of the management plan. For the first year or two of your plan, some creditors may hesitate to offer you additional credit.
In fact, it’s recommended that you wait to apply for new credit cards or other unsecured credit during your DMP, but you can still apply for student loans, mortgages and car loans. Also, the depth and variety of your credit history can be impacted if you include all of your credit in your DMP plan. For that reason, and if it’s an option, you may choose to keep one older account out of the plan (the age of your accounts can have a positive affect on your credit scores. The older the accounts, the better).
Debt management: Which debts can be included?
Besides keeping older accounts open, there are other things to consider when determining what to include in a DMP:
- Unsecured debt: DMPs are intended for unsecured debts, which are debts not tied to any collateral, such as your house.
- Older accounts: All accounts in your DMP will be closed. As demonstrating credit history can have a positive impact on your credit score, you may choose to keep one older account out of the plan.
- Charged-off accounts: You would typically not include charged-off accounts (those reported as a loss by your creditor). It will often make more sense to settle older collection account for less than the balance owed.
Debt management pros & cons
Debt management can help you pay off your debt without negatively impacting our credit, but it requires that you have consistent income for the next three to five years in order to make every one of your monthly payments.
You’ll also reduce the interest you’re paying on the accounts included in your DMP, which will lower your monthly payments. You’ll also not have to worry about the creditors included coming after you for payments as they will have agreed to the DMP plan.
The biggest challenge to a DMP is that there is no flexibility. If you miss one payment, you’ll likely lose the benefits of the plan. And, not only are you back at square one, you may have wasted time and money. For example, if you made your monthly payments of $600 for six months, you paid $3,600. If you miss the seventh month’s payment, your interest rates likely will return to the higher pre-DMP rates you were paying, and you’ve now incurred late payment fees. This puts you back on the 10- or 20-year timeline for paying off your balances. If you had used that same money to save for a few months and then begin a debt settlement plan, you’d have the potential to be out of debt in 18 months. Or, if you’d used that same money to pay fees associated with filing Chapter 7 bankruptcy, you’d be out from under your debt within 90 days.
Alternatives to debt management
There are certainly times when a DMP is not the right option for addressing your debt.
“I had a call forwarded to me in order to speak with a woman about settling her credit card bills for less than what she owed,” Resolve’s Michael Bovee said. “She had been on a DMP for close to two years by then. She could no longer keep up with her DMP payment. I asked about the chronology of events that caused her to enroll in a DMP, and why she could not keep up with it now…
“She broke down some while relaying the details and concluded with telling me she ate one meal a day, and her child was wearing shoes a size or more too small. Come to find out that she qualified for Chapter 7 bankruptcy all along, which is what she went on to use to get a fresh start.”
Step-by-step process for debt management
The good news is this process is fairly straightforward. By taking the following steps you should be able to quickly assess if a DMP is right for you. Even if you find it’s not, it can be a helpful process and can help you determine your best debt relief option.
- Step 1. Assess your debt and your potential savings. 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 check the savings you may get on your unsecured debt balances with this debt management calculator. If you’ll end up saving money through a DMP, it may be time to contact a licensed credit counseling agency in your state.
- Step 2. Find the right credit counseling agency. Look for a nonprofit credit counseling agency with counselors trained and certified by the National Foundation for Credit Counseling. Also, keep in mind the Federal Trade Commission warns against agencies that won’t provide free information about their services without requiring that you provide information about your situation. Consider fees: Do you want a free agency or are you willing to pay? Once you identify some potential agencies, you can check if there are complaints against them with your state attorney general and local consumer protection agency. The FTC recommends that you narrow your list to a few companies you’ll interview to make your final selection. You can use the commission’s list of suggested interview questions.
- Step 3. Have a budget counseling session. When you select the agency you’d like to work with, it’s time to have a budget counseling session. It’ll take 30 minutes to an hour. The counselor will then provide you with an exact quote of your payments, which should include any fees the agency charges. They may also make other suggestions to help you manage your budget or consider alternative debt resolution options.
- Step 4. Assess your budget. Armed with the payment quote, take a close look at your budget. Will you be able to follow the DMP to its completion? It’s best to have a savings account in case any emergency arises so that you can continue to pay on time. Remember, one missed payment can negate your DMP.
- Step 5. Commit or move on. If this plan works for your budget and you think your income will be consistent for the life of the plan, you can have the agency send a budget proposal to your creditors. Once agreed upon, you should then receive the official plan via mail or email. If a DMP is not right for you, it’s time to assess the other debt relief options outlined above.
Obviously, sorting out what debt relief plan is right for you is time consuming and can be daunting. If you’d like help considering all of your options, Resolve can do that. 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.