If you have more bills than money, you are not alone. Millions of Americans struggle with debts that they cannot pay. They may have lost their job, had a long illness, was injured in an accident, or just got into debt over their heads. Regardless of the reason, it can be difficult to get your head above water and back on a solid financial plan without help.
Solutions to Debt Problems – What Should I Do?
There are many ways of dealing with debt problems. Ignoring the debt is the one thing you should not do. Ignoring your debts only makes matters worse. Tackling your debt problems head-on is the best way to get rid of debts and take control of your finances.
If you are interested in either of these methods of resolving debt problems, we have guides for Chapter 7, Chapter 13, and debt settlement you can access free of charge on our website. However, in this article, we are going to discuss another method of getting rid of debts — a Debt Management Plan.
What Are Debt Management Plans?
Debt management plans are handled by third parties. You work with a company, usually a credit counseling agency or a debt consolidation company, to manage your debts for you.
Companies that offer debt management plans do not loan money to you, and they do not settle your debts with your creditors. Instead, the companies usually have agreements with various financial institutions and credit companies to offer lower interest rates when the payments are made through the debt management company.
The debt management agency may have also negotiated with the credit companies to waive fees that increase the amount you owe. The result is a monthly payment that should be lower than all your debt payments combined.
The lower interest rate allows you to apply more of your payment to the principal amount you owe. It does not lower the amount you owe, but a lower interest rate helps you pay off the amount you owe faster.
Credit companies and financial institutions typically offer the same lower interest rates and waive the same fees for all debt management agencies. Generally, you will not be able to get a lower interest rate by choosing one debt management agency over another agency.
How Does a Debt Management Plan Work?
A debt management counselor with the agency reviews your debts. The counselor determines how much money it takes to pay off your debts within three to five years. A monthly payment is calculated based on how much you owe.
Instead of making your payments directly to your creditors, you pay the company. The company then pays your creditors according to your debt management plan. Most debt management agencies require that your monthly payments be automatically debited from your checking account each month.
Debt management plans may sound appealing. Instead of dealing with the stress of paying bills each month, they are paid for you. You do not have to think about your debts again. In three to five years, the debts are paid in full.
If an agency makes a debt management plan sound appealing, it is because the counselor may not have explained the disadvantages of a debt management plan.
Things To Consider Before Signing Up for a Debt Management Plan
Credit counseling companies and non-profit debt management agencies make the process of signing up for a debt management plan sound easy. They are quick to discuss the advantages of a debt management plan, but they are not as quick to discuss the disadvantages of debt management plans.
Some things you need to consider before entering a debt management plan include:
1. Hidden Fees and Monthly Costs
Debt management companies charge fees for their services. Even non-profit companies charge monthly maintenance fees. Therefore, in addition to the amount you must pay each month for your debts, an additional amount is added for the company’s fees. When the fee is added to your monthly payment, you may not be saving any money each month. Also, there could be other hidden fees and start-up fees. Before entering an agreement, make sure you read the contract and ask for a written, itemized list of all fees and costs charged by the company or any third-parties.
2. You Must Close All Your Credit Cards
Your debt management plan requires that you close your credit card accounts. The company wants to ensure that you do not incur new debts on the accounts that would change your plan. If you consider a debt management plan because you can keep your credit cards, be sure you understand the terms of your plan. If you have to close your credit cards and your credit score has already been damaged because of late payments, Chapter 7 might be a better option to get out of debt.
3. It Only Works for Unsecured Debts
Debt management plans only include unsecured debts. If a lender or creditor holds a lien on collateral, the debt cannot be included in the debt management plan. Examples of debts not included in a debt management plan include mortgages and car title loans. Also, if a creditor has a wage garnishment order, that debt is not included in your debt management plan. If you are behind on your mortgage or car loan payments or your wages are being garnished, you may want to consider Chapter 13 to save your home and car.
4. You May Have Too Much Debt for a Plan
Debt management plans are calculated to pay the debts in the plan in full in three to five years. Therefore, if your debts are high, you may not be able to afford the monthly payment for a five-year plan. If you are struggling to pay your living expenses, you may want to consider a bankruptcy filing. You could get rid of your unsecured debts without paying any more money to the creditors if you qualify to file Chapter 7. If you reorganize your debts in Chapter 13, you only pay what you can afford to pay toward your unsecured debts.
5. You Can Set Up a Debt Management Plan On Your Own
You do not need a third party to call your credit card companies to request a reduction in your interest rate. In most cases, if you contact your credit card companies and other creditors, you may be able to get a lower interest rate. Some companies may waive fees on your account too. Many companies are willing to work with you to avoid bankruptcy. It is best to speak with a manager or supervisor to discuss revised payment plans and lower interest rates.
Do You Have Questions About Debt Management Plans?
If you have questions about debt management plans, the Savvy App, bankruptcy, or debt settlement, contact us to discuss your situation.
Our goal is to help get out of debt using the method that works best for you. To achieve that goal, we help you explore different debt-relief options, compare the pros and cons of each option, and provide the information you need to choose the option that is right for you.
Call or text us at 833-272-3631 if you have questions or want to request additional information.