No matter where you live or what you do, debt captures us all at one time or another. It could be the shiny new car in your driveway or the crisp new college diploma on your wall. Maybe you own your own business or made some other investment that ended poorly.
Whatever the cause, debt happens to all of us. By mid-2019, the total American consumer debt had neared $14 trillion, marking over five years of consistent increases each quarter. That doesn’t mean you must fall victim to mounting interest and growing debt, however. When debt creeps into your life, it’s important to resolve your debts and pay off your credit card debt fast before you fall subject to exorbitant interest rates and penalties.
Even when the stack of bills reaches epic heights, there is help out there, with many excellent debt management programs (DMPs) that can help you to clear the slate and boost your credit score. It’s simply a matter of which debt management program is the right one for you.
Table of Contents
- 1 What Is a Debt Management Plan?
- 2 Debt Management and Your Credit Score
- 3 What Does a Debt Management Company Do?
- 4 Selecting a Credit Counseling Agency
- 5 Debt Management Advantages
- 6 Debt Management Disadvantages
- 7 Debt Management vs. Debt Settlement
- 8 Debt Management vs. Bankruptcy
- 9 Alternatives to Debt Management Plans
- 10 Is a Debt Management Plan Right for You?
What Is a Debt Management Plan?
A debt management program is designed to offer debt relief as quickly as possible and at as little expense as possible. These programs are a commitment, usually lasting three to five years. Your total debt is combined into one large sum, so you can make just one monthly payment to steadily pay off all of your bills at the same time.
Debt management programs can also negotiate credit card debt settlements with your creditors on your behalf. This earns you lower interest rates and sometimes a smaller amount of debt, too, through debt forgiveness.
For this service, you will likely pay a monthly fee, as well as a one-time signup fee to set up your account. Some debt management companies are nonprofits and thus do not charge for their services.
Debt management plans are also flexible, with terms created around your specific debt to ensure that you can resolve your debt as quickly as possible.
Debt Management and Your Credit Score
Debt management helps you get back to financial wellness. The program administrators will help you determine how much paying off credit cards will improve your credit score and help you to achieve those goals over a three-to-five-year period. The idea is to pay off your debts with as little damage to your credit score as possible.
Your debt consolidation company will work with you to create a repayment plan you can afford. Through regular monthly payments, you not only reduce your total debt but also demonstrate improved creditworthiness.
A debt management company does not negatively impact your credit score; it seeks to do the opposite. However, the service will likely appear on your credit report as a partner in the resolution of your debts.
What Does a Debt Management Company Do?
A debt consolidation company should be able to help you through the following steps to eliminate your debt and improve your credit score:
- Review your budget to determine what you owe, as well as any current income and outstanding assets and liabilities.
- Revise your budget to account for the debt management company’s fees.
- Set a payment amount that you can reasonably afford each month, taking into consideration your monthly income, expenses, and bills.
- Freeze interest fees by agreement between your debt consolidator and your creditor to prevent you from accruing additional interest while you work out a repayment plan.
- Negotiate your debts through the use of your debt management company, who will use their experience and partnerships to lower interest rates and reduce your debt where possible.
- Begin monthly payments to your debt consolidation company based on your final negotiated debt.
Your future payments will go directly to the debt consolidation company, who then works directly with each of your creditors to resolve your debt.
Selecting a Credit Counseling Agency
To take advantage of a debt management program, you need an experienced credit counseling agency who can help you get on the right track.
Many credit counseling agencies offer specialized debt management programs, but it’s important to be able to identify the legitimate companies from the scammers. There are certain things that you should check to make sure you’re dealing with the right agency for you.
Some of the best credit counseling agencies are most commonly nonprofit organizations, and though online and phone services are available, the Federal Trade Commission (FTC) recommends finding a company with in-person services. Not only can it simplify the process, but seeing a company’s physical offices could also help you rule out any fraudulent or unlicensed counselors.
Credit counselors are available at most colleges, military bases, and housing authorities. The U.S. Cooperative Extension Service also has branches with credit counseling services.
Always take the time to check a company’s credentials with the National Foundation for Credit Counseling or the Financial Counseling Association of America. You can also check to see if any complaints have been filed with your state Attorney General. Additionally, the Better Business Bureau (BBB) is a good resource, as it shows the most recent consumer reviews.
Be wary of high fees or nonprofits that request large donations; these can sink you deeper into debt. Instead, your agency should offer free resources and events, such as educational materials and workshops. Debt management is not a solution designed to supply you with new or ongoing debt. A debt advisor’s role is to help you improve your credit score without taking on additional debt, so it’s important that you choose a credit counseling agency that reduces your debt, rather than adding to it with exorbitant fees.
What You Need to Start a Debt Management Program
Once you select the right credit counselor, there are certain steps you need to take to begin your new debt management program.
You will need to gather all of your financial records, including your debts and expenses. Your credit counselor will use this information to help you develop a monthly budget with a set schedule of payments.
You will make monthly deposits to your credit counseling agency who will organize and manage your payments each month. Your deposits will then be used to pay your debts, something your credit counseling agency will handle directly with your creditors. From start to finish, the entire process usually takes three to five years.
Debt Management Advantages
Debt management programs are popular because they are one of the best ways to consolidate debt with many advantages for your credit score.
This is an opportunity to lower your debt in one convenient, comprehensive package. Credit card consolidation saves you hours of time and stress that you would have spent organizing multiple payments to creditors.
You may also benefit from the professional expertise of a licensed debt consolidation expert who can help you find the best way to navigate and eliminate your debt. This includes helping you set a reasonable monthly budget and repayment plan that you can actually afford.
Debt management companies are also able to reduce your debt through a lower interest rate with just one total monthly payment.
Debt Management Disadvantages
While there are several advantages to a debt consolidation program, there are some drawbacks, too.
Debt consolidation programs are typically restricted to just credit card debt, which means that they may not be able to help you with your student loans or auto loan.
The process also requires a commitment of up to five years, during which time you may be unable to open any new credit accounts.
It is important never to miss a payment once your plan begins. A missed payment can nullify the arrangement and cause interest rates to once again spike.
Debt Management vs. Debt Settlement
It is easy to confuse the two, but there is a big difference between debt management and a debt settlement.
A debt settlement works much the same way as debt management, but you only pay a portion of your total debts, typically between 50% and 80% of the balance. You will be responsible for making payments to each creditor yourself. Without the credit freeze that a DMP provides, you will be forced to entertain regular calls from creditors as your credit score continues to drop.
Because you are not paying the entirety of your debts, this is noted in your credit report and can negatively impact your credit score.
Debt Management vs. Bankruptcy
Too much debt can be dangerous, and sometimes, debt management is not the right choice. There are times when even a debt management plan is not enough to restore you to financial health. Extreme debt, such a medical emergency, can bury you in a mountain of debt without any hope of a way out.
Bankruptcy allows you to eliminate all your debts if the court legally declares you bankrupt. You will still be legally obligated to complete credit counseling as with a debt management plan, but your debts will be erased if you are granted a Chapter 7 bankruptcy.
Bankruptcy is not an option for everyone, however. The Bankruptcy Protection Act of 2005 tightened the guidelines for filing bankruptcy, making it more difficult to file. In 2019, bankruptcy filings increased for the first time in eight years, with a total of 757,497 filings.
Alternatives to Debt Management Plans
While an excellent resource for many, debt management plans really only help with credit card debt. If you suffer from overwhelming student loan debt or are overburdened by a monstrous mortgage, a debt management program likely will not be able to help you.
There are many alternatives to a debt management program.
If you want to avoid the fees of a DMP, you can use the DIY approach to resolve your debts yourself. This is typically recommended if your debt is manageable, amounting to less than 15% of your annual income.
You can use one of the following approaches for your the management of your debt:
- Debt avalanche method: Paying debts according to the highest interest rate;
- Debt snowball method: Paying debts from smallest to largest.
Despite which method you choose, handling your debts yourself will still allow you to open new credit accounts in the meantime, unlike with a DMP.
Debt Consolidation Loan
A debt consolidation loan allows you to combine all of your debts, much like a debt management program, except you use a loan to pay off your debts in one lump sum. It allows you to lower the total due by eliminating the interest payments you would be charged over the life of the account. You can pay all of your debts off at once and focus on just one payment each month for your debt consolidation loan.
This is not preferable for some, as you must possess good credit to qualify for a loan, especially one of a large size.
Bankruptcy is a more extreme solution for more extreme debt that represents over 40% of your annual income. Bankruptcy could be the best option to eliminate your debt and wipe the slate clean.
It’s not without disadvantages, however. Although your credit score can begin to recover within just six months, a bankruptcy may still remain a stain on your credit report for the next seven years.
Is a Debt Management Plan Right for You?
Just because you have debt doesn’t mean that a debt management plan will be the right fit for you. It demands a long-term commitment, during which you must abide by a strict payment plan. You will be on your own to pay it, because you may not be able to open any new credit accounts until the program is complete. That means you will need a steady source of income not just now, but also consistently in the years to follow.
A debt management plan is a solution typically recommended for those with credit card debt between 15% and 39% of their annual income. If you think you can reasonably resolve your debt in under five years, a DMP can offer you an excellent solution to pay off your debt, improve your credit score, and ensure future financial health.
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