If you have credit card or other unsecured debt that’s gotten out of hand, a debt management plan is one solution available to you, especially if you have steady income. With this remedy, you may be able to have your obligations consolidated without the need for a loan. But is the strategy right for you? Well, let us look.
Here are the pros and cons of debt management – and more.
What is Debt Management?
Let’s start there. With this approach, you work with a nonprofit credit counseling agency and enroll in what’s called a debt management plan (DMP). With your permission, the counselor assigned to you will contact your creditors to see if they would slash your interest rates, reduce your monthly payments, or waive late fees
The counselor will also offer other ways to help you manage your money, perhaps through budget creation and figuring out ways to reduce your expenses.
How Does Debt Management Work?
Basically, you’ll work with the counselor to determine how much you can afford to pay monthly. Then under the plan, rather than paying your creditors directly, you’ll make a single monthly payment to the agency. In turn, the agency will pay your creditors for you in accordance with the payment schedule it worked out with them. You’ll have to pay the agency a nominal monthly enrollment and maintenance fee.
How Long Does the Process Take?
It will typically take between three and five years to pay off all your debts – if you make consistent payments. At the conclusion of your plan, your accounts will be cleared, and you will be debt free. Hopefully, you will have begun integrating other financial wellness efforts into your everyday life. During this time, it would be a good idea for you to check out more details on Dave Ramsey’s Baby Steps, which seek to simplify financial planning.
What are Some of the Benefits of Debt Management?
- No need for a loan. As we say up top, a debt management plan offers debt consolidation sans the need for a consolidation loan.
- It offers structure. With a DMP, you can be more organized, which will help you with the payment consistency that you need.
- Better rate. With a DMP plan, you may qualify for a lower interest rate and lower payment.
- Helps you with spending. You’ll have to create and stick with a budget that is realistic for you, and which is geared toward helping you achieve a financial goal.
- Helps with your credit. If you make consistent and timely payments in accordance with the plan, you will, at length, improve your credit scores.
- Gets creditors off your back. Because you are putting in the work and making those consistent payments on time, creditors or collectors have incentive to leave you alone.
What are Some Drawbacks to Debt Management?
- Potential scams. To avoid bad actors, check with the Better Business Bureau, your areas consumer protection agency, and your state’s attorney general to see if the agency is legit and whether there have been complaints.
- Notation on credit report. While enrollment in a DMP does not hurt your credit, such enrollment will be noted on your report for any potential creditor to see.
- You’ll need patience and commitment. As we’ve mentioned, it can take up to five years under a DMP to repay your debts.
- Credit restrictions. While enrolled in a debt management plan, you’ll be required to stop using any existing credit cards, and you won’t be able to apply for more credit.
- You must have a steady income. If you do not, and you miss payments, you may be kicked out of the program.
With these pros and cons of debt management, you can size them up against your situation and decide whether the strategy is right for you. Another option is debt relief, also called debt settlement, in which an agency such as Freedom Debt Relief can work with your creditors to negotiate a settlement of less than what you owe. You may want to check out this solution as well.