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Debt can happen to anyone, and sometimes managing the payments feels like treading water.
If you feel like you’re one missed payment away from being completely underwater, a debt management plan may be just the thing to help you get back on dry land.
What Is a Debt Management Plan?
A debt management plan takes all your unsecured debt and rolls it into one neat little package that allows you to make a single monthly payment to a consumer credit counseling agency rather than your individual lenders.
The consumer credit counseling agency will pay your monthly bills for you so that you are only required to make one monthly payment.
The debt management plan will still require you to make your minimum payments on time, but consolidating debt can help you focus your efforts on paying down your debt instead of just staying afloat.
How Do Debt Management Plans Work?
Debt management plans are executed by a consumer credit counseling agency. These agencies are both for-profit and non-profit, and both are not free, but the fee should usually be nominal and clearly defined in a contract.
The assigned consumer credit counselor will thoroughly go over the client’s financial situation and discuss all their options.
Once the agreed-upon terms are established between the client and the counseling agency for a debt management plan, the counselor will reach out on the client’s behalf and negotiate their debt with their creditors.
These negotiations are typically for reduced interest rates to allow the client to pay more on their principle, reduce the owed amount, waive fees, etc.
The consumer credit counselor will set up an automatic payment plan for the client to never miss a payment and stay on course to pay off debt. The credit counseling agency will then make sure that the creditors are paid their due.
Clients entering into a debt management plan will have to agree to several things, and the most important of these is no longer using their credit cards.
When the counselor negotiates their debt, creditors don’t want to see the client making it rain Benjamins at the club the next month.
The creditor is extending a good-faith opportunity to the borrower with the understanding that they have a plan to pay off their debts and intend to stick to it.
How Long Does a Debt Management Plan Last?
Debt management plan terms depend on the amount of debt to be paid and the financial capacity of each client.
Debt management plans are not a quick fix, and clients should expect to be in their plan for years, with 3 to 5 years being the average.
Who Offers Debt Management Plans?
Borrowers interested in a debt management plan should seek out a credit counselor to assist them in this process.
Credit Counseling Agencies
- Non-Profits: These agencies are not free, but they are more interested in helping clients pay down their debt without worrying about the bottom line. These agencies are typically Nationally registered, and the fees associated with the debt management plan are nominal. Non-profit agencies also place a large importance on financial counseling and education so that this is a life-long solution.
- For-Profit Companies: While for-profit consumer credit counselors are trying to help borrowers pay their debts, they are also concerned about making money for their business too. These for-profit companies will have higher associated fees and be less concerned with the education portion of the client’s financial practices reformation.
Alternatives to Debt Management Plans
Debt management plans are not a borrower’s only choice for finding a way out from underneath their debt. Debt management plans are just one option.
Debt Consolidation Loans
Borrowers with good to excellent credit may find that debt consolidation loans are the cheapest and easiest way to make debt less overwhelming.
These loans allow borrowers to take the new loan to pay off all the old debts. The new loan consolidates all of the debt into one payment with a clear repayment plan and end date.
Bankruptcy is a last-ditch effort but an important one if a borrower does not have the income to ever pay off their bills.
Bankruptcy is a legal process that requires the borrower to file under Chapter 7 or Chapter 13 in a federal court.
Bankruptcy comes with the attorney and court fees, but if granted, debt is completely forgiven. The major downside to bankruptcy is the impact on financial futures.
Bankruptcy stays on credit reports for up to 10 years and can impact everything from renting a residence to job prospects.
Borrowers should proceed with caution when considering a debt settlement plan. These plans are offered by for-profit companies and involve the company renegotiating client debt with the creditors.
They will ask for the lender to accept a lump sum less than what clients owe to reduce their overall burden.
Borrowers will be expected to pay money to an escrow account that will eventually pay the lump sum owed to the creditors, and they will be asked not to make payments to the lender during this time.
This method can negatively affect the client’s credit score. Unfortunately, many predatory companies are offering this type of service.
Are Debt Management Plans Safe?
Depending on the consumer credit counseling agency and the borrower’s commitment, debt management plans can be safe or a colossally bad idea.
Borrowers who pick a reliable consumer credit agency and are willing to follow the program set forth by their counselor can see great success safely and measurably.
Who Are Debt Management Plans Best For?
Debt management plans are best for borrowers with the means to pay their minimum bills but are overwhelmed by the logistics of paying off debt.
Those entering into a debt management plan must also be ready to live a life without credit cards for the duration of their repayment.
Bottom Line: What Is a Debt Management Plan?
A debt management plan is the consolidation of debts into one simple monthly payment by a consumer credit counselor to reduce the debt burden for an individual.