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How Debt Management Programs Work
If you attend credit counseling to get your debt under control, one of your many options may be a debt management plan. This arrangement is often referred to simply as a DMP or debt management program. When enrolled in this program, a credit counseling agency will work with your creditors to come up with suitable payments that meet your situation.
Before you sign a debt management plan at a credit counselor’s office, you will receive a detailed explanation of this program and how it applies to your budget and personal finances. A credit counselor can provide expert advice on how to reduce debt, control spending, stick to a budget, and pay off outstanding debt successfully.
In some situations, tips on how to control spending, reduce debt, and creating a budget are enough to solve minor financial issues. However, when it isn’t, a debt management plan or program can help.
Important Information About Debt Management Plans
Table of Contents
- Important Information About Debt Management Plans
- Debt Management Plan Potential Problems
- What Type of Debt is Eligible for Debt Management Plans?
- Step-by-Step Outline of a Debt Management Plan
- Alternatives to a Debt Management Plan
- Benefits and Advantages of a Debt Management Plan
- How a Debt Management Plan Effects a Credit Score
- A debt management plan is an agreement voluntarily made between three parties; debtor (client), counselor, and creditor.
- For a DMP to be successful, all parties must meet their expectations
- Unsecured debts may be used in a debt management program
- Mortgages, auto, student and home equity loans are not eligible debt for a DMP
- A debt management plan is not a cure for debt; it is only part of the solution
- Clients should take advantage of all financial educations courses offered by an agency
- Collection debt may only be included if there is no wage garnishment or court judgment
- No new credit may be obtained while participating in a DMP
- All credit cards must be closed to be eligible for most debt management plans
What to Expect from a Credit Counselor
- Credit counselors are obligated to provide clients with the following:
- A workable budget with continuing assistance
- Represent the client when speaking with creditors
- A place to accept deposits that will be dispersed to creditors on a fixed schedule
- Progress reports showing where funds were distributed and the status of current balances
- Education regarding credit history, reports, financial planning, using credit wisely, identity theft, and planning for unexpected expenses
- Support if clients have questions or issues during the process
How Creditors Are Involved
Creditors are keen to participate in debt management plans because it helps them recover money they are owed. Ways that creditors can take part in a DMP include:
- Payment Acceptance
- Cease collection actions (including phone calls)
- Update credit report to reflect participation in DMP
- Waived interest fees
- Lower monthly payments
- Re-aging of account to stop late fees
Not all creditors will offer the benefits mentioned above. Some will offer less, and others will participate in ways not mentioned. No matter how a creditor chooses to take part in a debt management program, it should help a client pay off the balance faster than they would have without it.
Lastly, and probably most importantly is the customer’s role in the successful completion of a debt management plan. It is crucial that a client fulfills all their obligations for the program to be a success. Requirements a customer must meet during this time include:
- Learning about credit and budgeting
- Making payments in full every month
- Not obtaining any new credit
- Call credit counselor with any questions or potential problems
- Read and pay attention to all progress reports and statements
Debt Management Plan Potential Problems
When you work in close collaboration with your credit counselor most, potential problems with a debt management plan should be avoided. It’s important to immediately contact your credit counselor with any issues, concerns, or questions about your program before due dates or deadlines. Failing to foresee a problem before it arises could result in the plan not being honored by the creditors. Potential problems that could occur include:
- Due date conflicts
- Late payments (lead to late disbursements)
- Missed payments
- Clerical errors
Costs Associated with a Debt Management Plan
Simple credit counseling is free of charge. If you require a credit counselor to create a debt management plan on your behalf, there will likely be an enrollment fee and possibly a small administration fee. Creating your own plan and working with creditors directly based on counseling your received from a credit counselor is free. Several DIY DMPs, such as those created by Suze Orman, can be purchased online.
What Type of Debt is Eligible for Debt Management Plans?
People are often confused about what kind of debt can be included in a debt management plan. As a rule, unsecured debts can be included, and secured debts cannot be. Examples of unsecured debt include credit cards and some medical or collection accounts. Examples of secured debt that cannot be paid off with a DMP include student loans, car loans, and mortgages. If you aren’t sure whether the debt you have acquired is secured or unsecured, a credit counselor can help you determine for sure.
Step-by-Step Outline of a Debt Management Plan
- Client contacts credit counseling agency
- Attend credit counseling appointment
- Receive budget and debt repayment plan
- Free education and money management advice are provided
- Debt and financial information are entered into credit counselor’s computer system
- Suitable candidates will be offered a Debt Management Plan
- Proposals are sent to creditors on a client’s behalf
- Automatic payment agreements are signed
- Funds distributed to creditors
- Progress reports sent to customers (done monthly)
- Monthly report reviewed
- Amount paid on DMP remains the same until all debts are repaid
- Clients must contact credit counseling agency with any issues, questions, or concerns
Alternatives to a Debt Management Plan
Benefits and Advantages of a Debt Management Plan
When you need to pay off debt, you’ll have several options. Before making a decision, it’s important to know the pros and cons. The advantages and benefits of a debt management program include:
- Small monthly payment
- Consolidated payments
- Reduced interest
- Most debt is eliminated in 5 years or less
- Debt reduction is accelerated
- No more collection phone calls
- Avoidance of bankruptcy
- Re-aged past due accounts
- Counseling is confidential
- No fees or obligation associated with credit counseling
How a Debt Management Plan Effects a Credit Score
Technically, participating in a DMP will not directly impact your credit score. However, paying off your debt will affect your credit. When all accounts are initially closed, a person’s credit score could take a dive. However, if payments are made in full every month, a person’s credit will improve with time.
Obviously, a debt management program isn’t the right solution for everyone. But nearly anybody can benefit from financial education and credit counseling. Clients that need a DMP can benefit from low-interest rates and reduced fees while consolidating outstanding debt into one manageable payment. Credit counselors will also receive expert advice and assistance with the program whenever necessary.
Since initial credit counseling sessions are free anyone considering a debt management program should consult with a credit counselor. With the help of a professional, you’ll be able to determine if a DMP is the best choice to handle your current financial situation.
For an even more in-depth guide on debt management, click here.