When you have various unsecured debts, there are several ways to pay them off. For example, you might consider a debt management plan (DMP).
The plan can typically be used for credit card debt, small medical bills, and debts that are in collections.
I used one myself many years ago. My ex and I created a debt management plan for our credit card debt.
It worked for us, but if I had known then what I know now, using a debt snowball would have been faster in our case. Of course you don’t know what you don’t know!
What is a Debt Management Plan?
A debt management plan is a plan for repaying your creditors that is put together by a nonprofit organization. The non-profit association works with both you and your creditors.
In short, as part of the service, a financial advisor will review your debt. The advisor will work with you and the creditors who agree to participate. The counselor creates a plan to pay off your debts over a specified period of time. You deposit money with the non-profit organization and they do the payments for you.
They may charge a monthly fee to join the DMP and may also charge a small set-up fee. Make sure you know exactly what the cost will be and when you will have to pay it. You shouldn’t have to pay anything until they provide a service for you.
How does a debt management plan work?
The process usually works like this:
- You make an appointment with one of the nonprofits that offer debt management plans. (Your meeting can take place in person, online, or over the phone.)
- They ask about your household income, monthly expenses, budget (if any) and your debts. So, you need to have a list of your bills and monthly expenses, your pay slips, and any recent bank statements for your credit cards and other debts.
- They will discuss your situation with you and work out a plan. They’re based on your credit report, budget, what you owe, and anything the places you owe money may agree to. If a believer does not want to participate, he does not have to participate. But usually you still need to add the debt to your plan. It will likely take about an hour to finish this part.
- While on the debt management plan, you make a one-time payment each month to the nonprofit responsible for the plan. Then they pay your creditors who know you are participating in the DMP.
- It is your responsibility to check your debt statements every month to make sure everything is being applied correctly, etc.
Typically, as part of the plan, you will need to close all of your credit cards and other lines of credit. So you are not allowed to continue using your credit cards when you sign up for a debt management plan. You are also not allowed to open any new ones while the plan is in effect.
(If this is what you are concerned about, here’s what you should know about credit card closing.)
Advantages and disadvantages of the debt management plan
Like everything, debt management plans have advantages and disadvantages. First, let’s explain the benefits of using it.
Benefits of Using a Debt Management Plan
The pros are pretty clear:
- You are meeting with a financial advisor at a nonprofit organization.
- It can be a relief when someone else is just making a plan for you.
- They make a one-time monthly payment that can be helpful if you have ADHD like me.
- Some creditors may agree to charge you a lower interest rate while on the debt management plan. So your current interest rates could go down.
- Some creditors can get rid of fees or financing costs.
- You will know when all of the debts in the plan will be paid off as long as you stick with it.
- You must close all of your credit cards and you cannot open any new ones.
- A good credit rating is not required to participate.
- It can help you avoid bankruptcy.
- Paying off debts is great!
But of course there are downsides to using a debt management plan. Let’s go over the next ones.
Disadvantages of using a DMP
Everything has a downside, doesn’t it? The disadvantages of debt management plans are:
- Paying off your debt can take longer than other methods.
- You cannot start right away.
- Usually you pay fees to be part of the program. So that will cost you money. The money could go into your debt instead. Not for profit doesn’t mean they don’t charge fees!
- You need to be careful about choosing a nonprofit that won’t withhold your first payment as a donation. That could be a big change.
- You have to make sure you are in one legit Debt management plan. Sometimes people think they are in if they really just pay someone who isn’t paying their debts for them and then try to negotiate. This is not a debt management plan.
- The relief you may find from someone else handling things can be a problem. Why? Because it may prevent you from making real, permanent changes. (Which is what is needed stay debt free.)
- Not all creditors agree to charge you a lower interest rate or to remove fees or financing costs.
Other things you should know about debt management programs
Tell someone you are signing up for a DMP and they will likely tell you not to as it will affect your bankroll.
But that may or may not be true, and it depends in part on who you owe and what your credit is now like.
Sometimes creditors report that you are Not Pay as agreed when you’re on schedule. (Even if they agree to accept the plan.) If so, your credit scores may be lowered. You can also add a note to your credit reports stating that you have a payment arrangement with them.
However, agreeing to pay off debts and reduce high credit card balances can also affect your creditworthiness better.
So it could be negative or positive. Either way, if you are wondering whether a debt management plan can affect your creditworthiness, the answer is yes.
Is A Debt Management Plan Right For You?
Of course it will depend on you. But in general, a debt management plan can be good for someone who:
- want someone else to work out the plan
- wants to know that if they follow the plan, they will be out of debt in a set time
- prefers a monthly payment for a set period of time
If paying a fee for just one monthly payment is appealing, this might be a good solution. Especially if you are more interested in getting out of debt than getting out of debt faster.
How long a debt management plan lasts varies. It depends on how much debt you have and how much you can really afford to pay it. But it usually takes several years. Ours took us about 3 years, but they can take longer.
When isn’t a debt management program the best choice? It probably doesn’t suit someone who:
- can easily make their monthly payments
- wants to focus on one guilt at a time or on a specific guilt first
- wants to pay things off asap
Sometimes the race wins slowly and steadily. It really depends on your personality, your money situation, and how well you’re able to hold onto things.
Either way, it’s a good idea to check out these common alternatives to a debt management plan.
How to sign up for one
Once you decide on a debt management plan, signing up for one is pretty easy.
Start by finding nonprofits that offer them. (National Foundation for Credit Counseling, CESI, and CCCS are some of them.) Check their ratings, rates, and services for your state as these may vary by office.
Then contact them for more information on how to register. They’ll set up your meeting, make sure you are clear on things, and get started when it suits you.
The bottom line
When you partner with a nonprofit to use a debt management plan, you can make a monthly payment for your consumer debt. It can lower interest rates and fees, but you may have to pay a monthly fee to participate.
So you have to weigh the pros and cons yourself. If you choose one, make sure it is reputable. And make sure you understand what to do and what it will cost before agreeing to join.
Regardless of what you choose to do, you will need to make changes in your financial life to ensure that things go well in the future.
Getting out of debt is a big step in the right direction.