The information provided in this article does not, and is not intended to, constitute legal or financial advice; instead, all information, content, and materials available in this article are for general informational purposes only.
Debt management (also known as credit counseling) is a debt relief option where a nonprofit agency would negotiate the interest rates on your debt. So, the debt management agency would try to negotiate a credit card with an interest rate of 29% to something like 7 or 8%, thus saving you money.
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, been 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. Debt management can take you from a place of financial uncertainty to financial stability.
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.
Some of the ways you can deal with debt include filing
bankruptcy and
debt settlement. However, each method has pros and cons, and neither method may be right for you.
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 these 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 agencies. Generally, you will not be able to get a lower interest rate by choosing one debt management agency over another agency.
How Much Will My Credit Counseling Monthly Payment?
With a debt management company, you have the monthly fee which can range potentially from $10 - $75 per month. You also will be added to a payment plan with your creditors, so you have to consider how much each creditor will now charge for your unsecured debt.
Thankfully, we built the following calculator below that takes your unsecured debt amount and then provides a monthly payment plan estimate for debt management. You can also compare it to other debt relief options.
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 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.
That said, many debt management companies do not work with unsecured personal loans. That said, there may be a few personal loan providers that will work with debt management companies:
- Navy Federal Credit Union
- One Main Financial
- Republic Finance
- Mariner Finance
Things To Consider Before Signing Up for a Debt Management Plan
Credit counseling companies and non-profit 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 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 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.
Effects on Credit Score
Debt Management plans can have an impact on your credit score – though it may not be as severe as other debt relief options. Being in a debt management plan can hurt your credit score in several ways. However, there are also some ways that a DMP could help your credit score. Let’s take a closer look at what a debt management plan can do to your credit.
Ways a debt management plan impacts your credit score include:
1) Notations of Debt Management Plans
The credit reporting agencies generally do not have a specific notation for DMPs. However, creditors that agree to be included in a DMP may notate that the account is included in a debt management plan, which could negatively influence new creditors as they consider whether to lend you money.
On the other hand, some lenders may view notations of a DMP as a positive indication that you are taking steps to pay off your debts in a responsible manner. They may also view your actions as a positive step to avoid
bankruptcy.
2) Payment History
Payment history accounts for 35 percent of your credit score. If a debt management company negotiates a lower payment amount, the creditor may report partial payments on your credit report. The partial payments could lower your credit score.
On the other hand, if the debt management plan pays at least the minimum amount due to each creditor and pays those payments on time each month, the DMP could help improve your credit score.
3) Closing Credit Accounts
Most companies require that you close the accounts included in your debt management plan.
One individual noted that the mortgage proposed increased his rate because of the accounts showing up as closed.
Another individual noted that his credit score dropped from 555 to 521 since enrolling in the debt management program. When you close the account, you lose the benefit of credit history. Your credit history makes up 15 percent of your credit score. Closing good-standing accounts can have a negative impact on this area of your credit score.
There is also another consideration. Closing accounts lowers the amount of money you can borrow (credit utilization ratio). A lower credit utilization ratio is better for your credit score. Therefore, closing the accounts improves one area of your credit score, but it may hurt another area at the same time. The benefits could offset each other depending on other factors used to
calculate your credit score.
4) Applying for New Credit
Some people in debt management plans apply for new credit because they had to close their credit accounts or cannot use their credit accounts included in the plan. However, applying for new credit can also hurt your credit score. If you apply for several new lines of credit within a short period, it can lower your credit score, and potential creditors view you as a higher risk. Therefore, rushing to apply for new credit could undo the positive impact of paying off debts.
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
