If you’re having difficulty with debt repayment, enrolling in a debt management program could be a viable solution. By consolidating multiple debt payments into a single manageable payment, debt management plans (DMPs) can make paying off debts less daunting. Additionally, DMPs may offer benefits like reduced interest rates or waived fees.
However, before pursuing debt management, it’s crucial to carefully weigh its advantages and disadvantages.
What Does Managing Debt Entail?
Debt management refers to a structured strategy for repaying unsecured debts, such as those from credit cards. Individuals who are overwhelmed by their debts may seek assistance from a debt management company or credit counseling agency. The company or counselor will review the debtor’s financial situation and work with them and their creditors to develop a debt management plan.
Debt management plans usually have a repayment period of three to five years, during which creditors may agree to lower interest rates and waive certain fees. Once all parties agree to the DMP, the debtor will make a single monthly payment to the debt management company or credit counselor, who will then distribute the funds to the creditors involved in the plan.
If you’re struggling to manage unsecured debts, debt management could be a viable option. This type of program can assist with the repayment of several types of debts, including credit cards, medical bills, and personal loans or lines of credit.
While working with a debt management company or credit counseling agency, you may be required to pay a fee for their services. This can include an initial fee for setting up or enrolling in a debt management plan, as well as a monthly fee that may be integrated into your monthly payment toward the plan. In certain situations of financial difficulty, these fees may be reduced or waived.
Benefits of a Debt Management Plan
Managing unsecured debt through a debt management plan offers several advantages, including:
Simplified Payments: Debt management plans simplify payment by consolidating multiple payments into a single payment each month.
Potential Savings: Debt management plans may lead to cost savings if they include interest rate reductions and fee waivers.
Time Savings: By enrolling in a debt management program, you may be able to pay off your debt more quickly and with greater predictability about when you’ll be debt-free.
Using a debt management program can help you steer clear of negative consequences if you’re at risk of missing payments. Late or missed payments can result in late fees and negatively affect your credit score, making it harder to secure new loans or lines of credit.
Enrolling in a debt management plan can also help you proactively prevent collection actions. In extreme cases, you could be sued for unpaid debts. However, managing your debts through a debt management program can assist you in staying current on your accounts.
Drawbacks of a Debt Management Plan
While debt management offers several benefits, it’s not a perfect solution for repaying debt. Here are some of the primary drawbacks to keep in mind:
Limited Debt Types: Debt management plans are generally intended for unsecured debts such as credit cards or personal loans. They can’t typically be used for secured debts like car loans.
Creditor Approval: The success of your debt management plan depends on whether your creditors agree to it. If some creditors approve while others don’t, it could complicate your repayment process.
Account Closures: To enroll in a debt management plan, you may be required to close one or more credit accounts. This means you won’t be able to use those cards, and you may be prohibited from applying for new credit.
One potential consequence of closing credit accounts as part of a debt management plan is the impact on your credit score. Your FICO credit score is partly determined by your credit utilization rate, which is the percentage of your available credit that you’re using. The lower this rate is, the better.
Closing accounts included in a DMP while you still owe a balance can reduce your credit limit and raise your credit utilization rate, potentially hurting your credit score.
It’s also important to consider the level of commitment required. Debt management plans only succeed if debtors are fully committed to them. However, if they don’t address underlying issues such as overspending or don’t take the plan seriously, it may not be successful.
Debt Management, Debt Consolidation, and Debt Settlement: What's the Difference?
Debt management and debt consolidation are terms that are sometimes used interchangeably, but they refer to distinct strategies. Debt management involves creating a plan for repaying debts, while debt consolidation combines multiple debts into one.
For example, you might take out a debt consolidation loan and use the funds to pay off all of your credit cards, then make a single payment toward the consolidation loan going forward.
Debt consolidation may or may not result in interest and fee savings, depending on the terms of the consolidation loan or balance transfer offer. Debt consolidation can offer more flexibility than a debt management plan, particularly if you’re not struggling to pay off your debts.
Debt settlement, on the other hand, involves negotiating to settle debts for less than what you owe. While it may be an option if you’re behind on payments, it can harm your credit score and may result in fees charged by debt settlement companies.
If you decide to pursue debt settlement, it’s important to work with a reputable company and be prepared for potential credit score damage.
Who Would Benefit from a Debt Management Program?
A debt management plan may be suitable for someone who:
Is finding it challenging to keep up with debt payments
Wants to simplify monthly payments
Would like to save money on interest and fees
Can afford the monthly payments required by a DMP.
If you’re unsure whether a debt management program is the best choice for your situation, consulting a certified credit counselor can provide valuable insight. Credit counselors can assess your income, budget, spending habits, and debts to determine whether a DMP is a good fit. If it’s not, they can suggest alternatives, such as debt consolidation or bankruptcy.
None of these options may be necessary. In some cases, you may simply need assistance in refining your budget to find additional funds to pay down your debts. A credit counselor can offer guidance in this area as well.
Selecting a Debt Management Program: What to Consider
If you believe that debt management is the most suitable approach to address your financial situation, it’s crucial to carefully evaluate companies before selecting one. While many reputable companies offer debt management services, there are also fraudulent organizations to watch out for.
When researching debt management companies, the first step is to verify their credentials. Look for credit counselors who are certified by either the National Foundation for Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA).
Once you've confirmed a company's credentials, ask for details about their services and fees. Inquire about the following:
Which types of debt are eligible for enrollment in a DMP
The duration of the debt management plans
Potential interest rate reductions and fee waivers
Estimated monthly payments
Up-front and monthly fees
It’s essential to understand your responsibilities once you enroll in a debt management plan. For example, you should be aware of payment due dates and the consequences of late or missed payments. The more questions you ask in advance, the fewer surprises you’re likely to encounter once you’ve enrolled in a debt management program.