Sky-high inflation, turbulent markets and ballooning interest rates have made life tough for consumers. To wit: Half of Americans reported that they are financially worse off now compared to last year, according to a recent Gallup poll.
Debtholders, thanks to higher borrowing costs, have had it particularly rough. If your red ink has become overwhelming, one option to consider is a debt management plan (DMP).
What is debt management?
In a debt management plan (DMP), clients work with a consumer credit counseling agency to come up with a repayment plan and follow through on it.
“We also work with your creditors to lower interest rates, waive or eliminate fees and stop collection calls,” said Tayri Martinez-Orza, a quality assurance specialist at GreenPath Financial Wellness, a nonprofit financial counseling service.
If the creditor is willing to negotiate, “clients end up saving money on interest and getting out of debt sooner because more of the payment goes toward reducing the principal balance,” Martinez-Orza said.
Who would need a debt management plan?
A debt management plan is best for people who are stressed about their obligations, but aren’t yet in dire straits. If you have a pile of debt built up, are struggling to make payments and starting to fall behind, it might be for you.
“DMPs are generally best for those facing a less-severe financial hardship,” said Sean Fox, president of Achieve Debt Resolution, a personal financial services company.
If you are several months behind on all of your payments, and getting regular calls from debt collectors, you might benefit from a DMP.
How debt management works
Think of the DMP itself as a roadmap, crafted in consultation with a credit counselor, that will help you work down unsecured debt, such as credit cards, as cheaply and quickly as possible.
Your debt management counselor negotiates with your creditors to reduce fees and interest rates, then helps you to both create the plan and stick with it. In many cases, you’ll make one payment to the agency, which will then pay your creditors on your behalf. You do not open a new loan or take on more debt. In fact, the accounts in debt may be closed.
A plan with a non-profit provider will likely come with a free initial consultation, but you’ll likely have to pay a fee for the service. (National rates are capped at $79, but some states have lower limits.) Beware for-profit providers, and make sure to avoid credit counselors that charge exorbitant fees. The Consumer Financial Protection Bureau (CFPB) recommends you receive a fee quote in writing.
You will need discipline, though, to succeed. Most plans are three-to-five years long, and only work if you keep up with your payments.
Pros of debt management plan
Setting a goal and getting a professional on your side can help you to see a light at the end of the tunnel of debt.
Lower interest rates and fees
If your creditors agree to work with your debt counselor, you could get a lower interest rate and cancel or, perhaps, stop incurring fees. Your creditors may agree to lower rates or fees because you’ve made a concerted effort to pay them back. The debt is unsecured, after all, and they may receive less if you ultimately declare bankruptcy.
Stop collection calls
With a DMP in place and money being paid, your creditors may stop contacting you and causing you stress.
Whether you have a DMP or not, you have the right to tell a debt collector to cease communicating with you based on the Fair Debt Collection Practices Act (FDCPA).
If you are dealing with constant calls, follow these steps outlined by the CFPB:
- Identify who the creditor is, including their address and phone number.
- Find out how much is owed, including any fees, interest or collection costs.
- Ask when the debt was incurred and for what purpose.
- Determine the name of the original creditor.
- Make sure it is you, and not someone else, who owes the debt.
Work with a non-profit organization
You work with a credit counseling agency to craft a DMP. They are not-for-profit organizations and their goal is to assist consumers. Other debt solutions require you to work with for-profit businesses like lawyer firms and debt settlement companies.
Nonprofits typically charge fewer fees than for-profit businesses. Search the National Foundation for Credit Counseling or Financial Counseling Association of America to find a counselor that fits your needs.
A single payment
One of the biggest benefits of a debt management plan is that you could get a streamlined, single payment.
A single payment can help you save money, as you’re less likely to miss a payment, incur late fees and face mounting interest. Moreover, the simplicity of dealing with one monthly payment, rather than several, will make your finances easier to manage.
A financial road map
The payment schedule sets a goal for you to reach and tells you how to get there. It provides a timeframe and you can see when you’ll eliminate your debt.
A DMP, with a payment due each month, will hold your fee to the fire, and make it less likely that you delay your debt payments.
A chance to improve your credit
The largest factor used to calculate your FICO credit score is payment history (35%), followed by amounts owed (30%), length of credit history (15%), credit mix (10%) and new credit (10%).
“Making those timely payments will typically improve your credit over time,” said Martinez-Orza.
You might also be able to re-age your credit accounts, changing their status to current, then your DMP payments will be recorded as one-time, and thereby incrementally improving your credit.
However, if your credit cards are closed, then your credit utilization may rise, which could negatively affect your credit.
Regardless, you need to take the longview: working down your debt will help your score in the long run.
Cons of debt management
A DMP isn’t always the answer and following through on one might not be easy.
It’s not debt elimination
It’s important to note that DMP doesn’t erase debt; you will still be paying it off. This can cause challenges if you’re not prepared.
“In many cases, consumers attempt a debt management plan, but eventually wind up filing bankruptcy because they can’t afford the payments,” said Fox.
Unsecured debt only
A DMP only applies to what you owe from credit cards, personal loans and other such unsecured debt. It doesn’t apply to things like mortgages and car loans.
Creditors have to agree
The businesses and people you owe money to don’t have to agree to waive fees or charge less interest. In most cases, they’re under no legal obligation to work with you and have the right to refuse to accept less money.
There are likely fees
You may need to pay the debt counseling agency that administers your plan.
“DMP fees vary based on your state of residence and debt amount,” says Martinez-Orza. For example, her agency charges a one-time set up fee and a monthly fee.
However, these fees could be minimal considering the amount of money you can save in reduced interest charges, waived fees and in preventing future financial problems.
No new lines of credit
Enrolling in a plan can also limit your ability to access ongoing credit. You typically aren’t able to take out a new home loan or car loan while you have a DMP.
Also credit cards enrolled in the plan will be closed as you pay them off, “although most creditors will usually allow you to use one credit card for emergencies,” Martinez-Orza said.
Debt management vs. debt consolidation
Debt management and debt consolidation have the same aims – to help you simplify your finances, reduce what you owe, stop collection calls and set you up for success. However, they differ in how they accomplish those goals and are better for different people.
In debt consolidation, you take out one new loan and use it to pay off all (or most) of your other debt that has higher interest rates. You then make monthly payments on the debt consolidation loan until it’s paid off.
Debt consolidation makes sense if you can both secure a lower interest rate than what you owe on your credit cards, and receive a big enough credit line.
The average credit card interest rate in March, 2023 was 24.10%, whereas the best debt consolidation loans have rates ranging from 6.99% to 35.97%.
Debt management vs. debt settlement
With a debt management plan you work with a trusted non-profit credit counseling agency to pay back all debt. By contrast, in a debt settlement situation, you work with a for-profit company and ultimately pay less than what you owe.
Debt settlement can severely impact your credit, you will likely owe taxes on the amount of debt that is forgiven and debt settlement companies charge fees that range from 15% to 25% of your enrolled debt.
Alternatives to debt management
It’s important to select the debt relief strategy that works for you. Each of these options have their own pros and cons that you should consider carefully before committing.
- See if you’re eligible for hardship assistance. Many creditors and government agencies have options for people who are facing financial hardship.
- Get financial counseling. You can talk with a credit counselor and get help without signing up for a DMP.
- Do a balance transfer. Rather than keeping your credit card debt in an account that’s charging interest, transfer it to a credit card that has no interest or low interest. Here are the best 0% intro APR credit cards.
- Use a debt payback method. To structure your finances, you can adopt a proven plan to attack debt with the snowball method.
- Consider debt settlement. If things are looking bad and your credit score is already doomed, debt settlement might have more pros than cons.
- Look at bankruptcy. If things are really bad and there’s no feasible way out of debt, bankruptcy might be the answer. Be aware though that you must qualify for it and it’s not an easy solution.
Frequently asked questions (FAQs)
Yes, you can work directly with your creditors to request lower interest rates and waived fees. However, credit counselors typically have a better sense of the system’s ins and outs and have established relationships with creditors, which can provide a large benefit. Plus you’d be responsible for making on-time payments to multiple creditors.
A debt relief program could help you lower your debt, waive fees, stop collection calls, lower your interest rate and consolidate your payments into one payment. Ultimately, it should help you improve your credit score as well.
The specific drawbacks depend on the type of program you use, but can include the facts that many programs provided by third parties charge fees and that sticking with a payment plan over a period of years can be hard. Some programs don’t allow you to take out any new loans during this time and debt cancellation can be expensive with fees and taxes.
You want to be careful not to be taken advantage of by debt management scams. Martinez-Orza cited some telltale signs of a company to watch out for:
- They guarantee they will reduce or cancel your debt.
- You must pay in advance of them accepting your case or successfully negotiating a settlement.
- They insist you use an intermediary.
- They ask you to stop working with your creditors.
To identify a legitimate, reputable nonprofit credit counseling agency, check if the agency is accredited by the Council of Accreditation (COA) and a member of the National Foundation for Credit Counseling (NFCC). You should also check their ratings by the Better Business Bureau (BBB).
FAQs
What are the negatives of a debt management plan? ›
- your debts must be repaid in full – they will not be written off.
- creditors don't have to enter into a debt management plan and may still contact you asking for immediate repayment.
- mortgages and other 'secured' debts are not covered by a debt management plan.
Sometimes a creditor will refuse to deal with a DMP provider. This could be because the creditor doesn't want to accept the reduced payments or sometimes it could be because they've objected to you using a fee-charging provider, which would mean there's less money to pay the debts you have with them.
What happens if you go on debt management plan? ›A DMP is an informal agreement between you and your creditors for paying back your non-priority debts. Non-priority debts are things like credit cards, loans and store cards. You pay back the debt by one set monthly payment, which is divided between your creditors.
How much can I save with debt management plan? ›This nonprofit credit counseling agency says clients usually complete the debt management program within 48 months on average and save around $140 per month. Cambridge counselors say they are typically able to negotiate interest rates from about 22 percent down to 8 percent on average.
Do I have to put all my debts into a debt management plan? ›Include all of your debts.
Make sure all of your debts are included in the DMP, even if you think you can manage that catalogue payment or want to keep your overdraft 'for emergencies'. Sometimes you might have missed a debt from your plan, so be sure to let your DMP provider know about any changes as soon as possible.
- court fines.
- TV Licence.
- Council Tax.
- gas and electricity bills.
- child support and maintenance.
- Income Tax, National Insurance and VAT.
- mortgage, rent and any loans secured against your home.
- hire purchase agreements, if what you're buying with them is essential.
How long does a DMP stay on your credit file? Debts will stay on your report for six years, starting from the date they're paid off or defaulted. A DMP means you'll repay your debts more slowly, so your score may be negatively impacted for longer.
What's the worst a debt collector can do? ›While debt collectors can't threaten you or mislead you, they can apply pressure to collect payment. This pressure can include daily calls, frequent letters, or talk about pursuing a lawsuit for payment on the debt — as long as they stay within the bounds of the law.
Can you buy a car while on a debt management plan? ›It's not against any guidelines to buy a car during your DMP. However, your DMP agreement is likely to state that you must not take out any additional credit without speaking to your DMP provider first. Before buying a car, it's important to make sure that the associated costs are realistic and affordable.
Who is the best debt management company? ›| Company | Debt Management Plans | Debt Settlement |
|---|---|---|
| National Debt Relief Best Overall | Yes | Yes |
| Accredited Debt Relief Best for Debt Settlement | Yes | Yes |
| New Era Debt Solutions Best for Customer Satisfaction | Yes | Yes |
| Freedom Debt Relief Best Interactive Program | No | Yes |
What happens after 6 years on a DMP? ›
What happens when my DMP is finished? The debts associated with your DMP may still stay listed on your credit report until the six-year period is up from when they were added – if they have defaulted or there are CCJs associated with them, for example – but the marker for your DMP will be removed.
How to rebuild credit after debt management? ›- Pay Bills on Time. Pay all your bills on time, every month. ...
- Think About Your Credit Utilization Ratio. ...
- Consider a Secured Account. ...
- Ask for Help from Family and Friends. ...
- Be Careful with New Credit. ...
- Get Help with Debt.
A DMP isn't a legally binding agreement. This means that you can cancel it if you want to. There are a number of reasons why you might want to cancel, including: you're not happy paying a fee each month which means there's less money left to pay your creditors.
How can I pay off $50000 in debt in one year? ›- The benefits of paying off all your debt in a year. ...
- Tips to pay off $50,000 of debt in a year. ...
- Create a budget and track all expenses. ...
- Be mindful of debt fatigue. ...
- Prioritize paying high-interest debt first. ...
- Get a higher-paying new job. ...
- Freelance on the side.
Now that we've defined debt-to-income ratio, let's figure out what yours means. Generally speaking, a good debt-to-income ratio is anything less than or equal to 36%. Meanwhile, any ratio above 43% is considered too high. The biggest piece of your DTI ratio pie is bound to be your monthly mortgage payment.
Can I keep my bank account with a debt management plan? ›If you have no outstanding debts with your current bank you should be able to continue using the account you already have with them. However if you do owe money to them and intend to include these debts in your DMP, you will need to open a new bank account before you start.
Can I put all my debt in one place? ›What is a debt consolidation loan? If you've got lots of different credit commitments and you're struggling to keep up with repayments, you can merge them together into one loan to lower your monthly payments. You borrow enough money to pay off all your current credit commitments and owe money to just one lender.
Is it better to let debt go to collections? ›A fully paid collection is better than one you settled for less than you owe. Over time, the collections account will make less difference to your credit score and will drop off entirely after seven years. Finally, paying off a debt can be a tremendous relief to your mental health.
Which method is best for paying off debt? ›Pay off your most expensive loan first.
Then, continue paying down debts with the next highest interest rates to save on your overall cost. This is sometimes referred to as the “avalanche method” of paying down debt.
No matter which form of bankruptcy is sought, not all debt can be wiped out through a bankruptcy case. Taxes, spousal support, child support, alimony, and government-funded or backed student loans are some types of debt you will not be able to discharge in bankruptcy.
What type of debt can be forgiven? ›
Debt forgiveness is usually available for unsecured debts like credit cards, personal loans, or student loans. Secured debts like a mortgage or a car loan are not usually eligible for debt forgiveness. If you default on a secured debt, the lender will likely pursue foreclosure or repossession.
Can you buy a house while on a DMP? ›If you're in a DMP and paying down your existing debt, you might find yourself looking to apply for a new loan, such as a mortgage or auto loan. While being in a DMP may make it harder to get these loans, it will not automatically disqualify you.
What is the minimum debt level for a DMP? ›There's no maximum or minimum debt level needed to enter a DMP, but there are some things to consider before applying. A DMP is good for those who are struggling to keep up with their debt repayments, but who can afford to consistently pay smaller amounts over a longer period of time.
Can I add another debt to my DMP? ›You can add a new debt to an existing debt management plan (DMP). You might need to do this if you forgot about one when you set up the plan. Alternatively you may have borrowed more which you are now struggling to repay.
What is the 11 word phrase to stop debt collectors? ›If you are struggling with debt and debt collectors, Farmer & Morris Law, PLLC can help. As soon as you use the 11-word phrase “please cease and desist all calls and contact with me immediately” to stop the harassment, call us for a free consultation about what you can do to resolve your debt problems for good.
What is the 777 rule with debt collectors? ›One of the most rigorous rules in their favor is the 7-in-7 rule. This rule states that a creditor must not contact the person who owes them money more than seven times within a 7-day period. Also, they must not contact the individual within seven days after engaging in a phone conversation about a particular debt.
What happens if you never answer debt collectors? ›If you get a summons notifying you that a debt collector is suing you, don't ignore it. If you do, the collector may be able to get a default judgment against you (that is, the court enters judgment in the collector's favor because you didn't respond to defend yourself) and garnish your wages and bank account.
Can I get a credit card after a debt management plan? ›It is possible to get credit while on a DMP, and there may be circumstances in which it's advisable. But if you're on such a plan because you were having trouble making your payments on time, adding more debt while you're still in the process of eliminating your old debt is asking for trouble.
Does a debt management plan close your credit cards? ›Cons of a Debt Management Plan
You'll be required to close your credit card accounts to avoid taking on even more debt. You won't be allowed access to new lines of credit such as an auto loan or a loan to remodel your home. You must commit to making the single monthly payment consistently.
You can still get a credit card after debt settlement
While it may be difficult to open a new line of credit with a lower credit score, debt settlement does not prevent you from getting a new credit card in the future.
How long does a DMP stay on your credit file? ›
How long does a DMP stay on your credit file? Debts will stay on your report for six years, starting from the date they're paid off or defaulted. A DMP means you'll repay your debts more slowly, so your score may be negatively impacted for longer.
Are there any disadvantages to consolidating debt? ›Debt consolidation might lower your monthly payments, make managing your monthly payments easier, decrease your interest rates and save you money overall. But there are also potential drawbacks, such as upfront fees and the risk of winding up deeper in debt.
What are the negative effects of debt review? ›While enrolled in the debt review program, you are not permitted to take credit. The reduction of your monthly repayments means that the debt repayment term will be extended. Thus taking longer to finish paying. You will no longer receive calls from credit providers, debt collectors, and lawyers demanding payment.
Can I still use my credit card after debt consolidation? ›Can I still use my credit card after debt consolidation? Certain types of debt consolidation will automatically close your credit cards, while other options, like a balance transfer credit card or HELOC, will not. If the account remains open and in good standing, you can use your credit cards after consolidation.
Is it a good idea to consolidate all your bills? ›Combining multiple outstanding debts into a single loan reduces the number of payments and interest rates you have to worry about. Consolidation can also improve your credit by reducing the chances of making a late payment—or missing a payment entirely.
Does debt consolidation affect your taxes? ›Debt settlement will appear on your credit report as such and hurt your credit score. Also, you may have to pay taxes on the difference between what you paid and what you owed. Yes, the amount of debt you didn't pay is generally reported to the IRS as income.
Is it wise to be under debt review? ›Debt review is a legal process and is also useful in that your overall debt repayments can be reduced and negotiated by your debt counsellor on your behalf. The advantage of debt review is the ability to protect you against asset repossession, legal action and creditor harassment.
What are 3 consequences of too much debt? ›This means you have too much debt and your debt ratios show difficulty keeping up with your short-term and long-term debt obligations. This makes you susceptible to late fees, default and eventually bankruptcy. It also makes your business unattractive to prospective lenders or creditors.
Can I pay my creditors directly while under debt review? ›The answer: Yes, you can pay your creditors directly while under debt review if you choose to do so from the start. A consumer in debt review has two options for repaying their debts, according to the National Credit Act: Pay your debt yourself, or allow your debt counsellor to do it for you.