A Debt Management Plan (DMP) can help manage your payments and even reduce your accruing debt, and is one of many debt relief solutions available. If you’re having trouble paying your bills every month, a DMP might be exactly what you need. Keep reading to learn more about how it works.
What is a Debt Management Plan?
Debt Management Plans are defined as “an agreement between a debtor and a creditor that addresses the terms of an outstanding debt.”¹
It’s a debt solution that combines your unsecured debt payments into one monthly payment and allows you to pay off debt in three to five years by reducing interest rates, monthly payments, and late fees.
If you’re struggling to pay off credit card debt or unsecured loans, a DMP can be a magical alternative to bankruptcy. You will make one monthly payment directly to your credit counseling agency, who then will pay the creditors an agreed-upon amount.
How do Debt Management Plans work?
Debt management plans work by discussing your current financial situation with a credit counseling agency who will then create a plan to pay off the amount you owe to creditors. The process starts by having a consultation with a financial coach who will review your current finances and help you understand your options.
Your coach can then negotiate with your creditors on your behalf to create new payment plans, such as reducing minimum payments, lowering interest rates, and stopping late fees. Then, rather than pay your creditors separately each month, you pay a one-time monthly payment to the credit counseling agency. The goal is to do so in a way you can afford and ultimately become debt-free while the creditors get paid. It’s a win-win.
Can creditors refuse a DMP?
A creditor does have the right to refuse any Debt Management Plan sent to them. Each company has its own set of rules for what they will and will not accept. That said, even if your account hasn’t always been in great standing, there’s still a change your creditors will work with you.
How long is a Debt Management Plan?
The timeline for full repayment is often three to five years. The timeline depends on how much debt you have and how much you can afford to pay each month.
Do DMPs really work?
Debt management plans can help someone struggling to pay back overwhelming amounts of unsecured debt. But, these plans are not for everyone.
Depending on your situation, bankruptcy or another form of debt relief may provide even more benefit. We recommend consulting with a professional to understand all of your financial options.
What are the benefits of a Debt Management Plan?
Here are some of the benefits you may find from a DMP:
- Reduced stress.
Having debt without a plan to pay it off can feel like a never-ending cycle. With professional advice, you’ll be able to create financial goals, review your budget, and figure out the options to best serve you in the future.
- Waived fees and lower payments.
A financial coach can negotiate with your creditor to waive fees and lower your monthly payments, which will help pay off your debt faster and create space in your budget for other necessary expenses.
- You’ll pay off debt faster.
If your coach can negotiate a lower interest rate, a larger percentage of your payment will go to your debt balance, meaning less debt more quickly.
- It’s a one-time monthly payment.
Managing one bill is much easier than trying to stay on top of multiple bills from several different creditors.
- You have someone on your side.
Your coach is there to help you, not pressure you into a more difficult financial situation. Unlike some debt relief solutions, it’s comforting to know someone is there to have your back and keep you on track to success.
Disadvantages of a Debt Management Plan
Here are some other factors to consider when deciding if it’s the right decision for you.
- DMPs only resolve unsecured debt.
Mortgages, car loans, student loans, and most medical bills are often not covered with Debt Management Plans.
- You can’t have open credit cards.
Plus, applying for a new credit card during this period may lead creditors to cancel the agreement made with your financial agency.
- A missed payment can end it.
Sticking to the plan you and your coach made is essential to ensure your Debt Management Plan isn’t cancelled by missing a payment here and there.
FAQs
Are Debt Management Plans legally binding?
Debt Management Plans are an agreement between you and your credit counseling agency. If you’ve enrolled in a DMP and are struggling to stay on track, contact your coach and explain your circ*mstances as soon as possible.
Does a Debt Management Plan affect your mortgage?
A Debt Management Plan doesn’t include secured debts (a.k.a debts secured against property that you own like cars or other property), so it won’t affect your mortgage payments. Before committing to a DMP, you will work with your financial coach to make sure the amount you pay towards your mortgage will be factored into your budget. This way, you’ll reach an affordable figure to pay back to creditors instead of continuing to struggle to pay all your bills.
Can you get a mortgage after a Debt Management Plan?
You’ll be able to get a mortgage more easily than you would have if you’d applied prior to completing your Debt Management Plan. This is because you won’t have any unsecured debt to worry about and you’ll have your full income available to use for a mortgage plus other expenses.
How will a Debt Management Plan affect my credit rating?
Short answer: a Debt Management Plan won’t directly impact your credit score.
In fact, ensuring that your accounts are paid on time will likely give your credit score a boost. These plans do require you to make monthly payments, so if you don’t stick with it, there can be significant negative impacts on your credit history and score. If your Debt Management Plan includes your creditors re-aging your past due accounts and setting them as current, your monthly DMP payment will ensure payments on all accounts included in your DMP. This will help you build a positive payment history, thus making your credit score higher. Also, you’ll be repaying your accounts in full, which is better than settling your debts for less than the full amount owed.
One important factor to consider is closing your account(s). This could increase your credit utilization ratio, or the percentage of your total available credit on all the accounts (like credit cards) you’re currently using. You want a lower utilization ratio to keep your credit score high, so closing credit cards can decrease your available credit. The impact this has varies person-to-person and depends on your exact situation, so be sure to talk with your coach about this first.
How much do Debt Management Plans cost?
You can stop holding your breath! Debt management plans are always either free or low cost. There may sometimes be an enrollment fee of $50, and sometimes there’s a monthly administrative fee, which maxes out at $75. It all depends on what state you live in, so be sure to ask up-front. Most times, your interest savings can cover these costs.
