Sky-high inflation, turbulent markets and ballooning interest rates have made life tough for consumers. To wit: Half of Americans reported that they are financially worse off now compared to last year, according to a recent Gallup poll.
Debtholders, thanks to higher borrowing costs, have had it particularly rough. If your red ink has become overwhelming, one option to consider is a debt management plan (DMP).
What is debt management?
In a debt management plan (DMP), clients work with a consumer credit counseling agency to come up with a repayment plan and follow through on it.
“We also work with your creditors to lower interest rates, waive or eliminate fees and stop collection calls,” said Tayri Martinez-Orza, a quality assurance specialist at GreenPath Financial Wellness, a nonprofit financial counseling service.
If the creditor is willing to negotiate, “clients end up saving money on interest and getting out of debt sooner because more of the payment goes toward reducing the principal balance,” Martinez-Orza said.
Who would need a debt management plan?
A debt management plan is best for people who are stressed about their obligations, but aren’t yet in dire straits. If you have a pile of debt built up, are struggling to make payments and starting to fall behind, it might be for you.
“DMPs are generally best for those facing a less-severe financial hardship,” said Sean Fox, president of Achieve Debt Resolution, a personal financial services company.
If you are several months behind on all of your payments, and getting regular calls from debt collectors, you might benefit from a DMP.
How debt management works
Think of the DMP itself as a roadmap, crafted in consultation with a credit counselor, that will help you work down unsecured debt, such as credit cards, as cheaply and quickly as possible.
Your debt management counselor negotiates with your creditors to reduce fees and interest rates, then helps you to both create the plan and stick with it. In many cases, you’ll make one payment to the agency, which will then pay your creditors on your behalf. You do not open a new loan or take on more debt. In fact, the accounts in debt may be closed.
A plan with a non-profit provider will likely come with a free initial consultation, but you’ll likely have to pay a fee for the service. (National rates are capped at $79, but some states have lower limits.) Beware for-profit providers, and make sure to avoid credit counselors that charge exorbitant fees. The Consumer Financial Protection Bureau (CFPB) recommends you receive a fee quote in writing.
You will need discipline, though, to succeed. Most plans are three-to-five years long, and only work if you keep up with your payments.
Pros of debt management plan
Setting a goal and getting a professional on your side can help you to see a light at the end of the tunnel of debt.
Lower interest rates and fees
If your creditors agree to work with your debt counselor, you could get a lower interest rate and cancel or, perhaps, stop incurring fees. Your creditors may agree to lower rates or fees because you’ve made a concerted effort to pay them back. The debt is unsecured, after all, and they may receive less if you ultimatelydeclare bankruptcy.
Stop collection calls
With a DMP in place and money being paid, your creditors may stop contacting you and causing you stress.
Whether you have a DMP or not, you have the right to tell a debt collector to cease communicating with you based on the Fair Debt Collection Practices Act (FDCPA).
If you are dealing with constant calls, follow these steps outlined by the CFPB:
- Identify who the creditor is, including their address and phone number.
- Find out how much is owed, including any fees, interest or collection costs.
- Ask when the debt was incurred and for what purpose.
- Determine the name of the original creditor.
- Make sure it is you, and not someone else, who owes the debt.
Work with a non-profit organization
You work with a credit counseling agency to craft a DMP. They are not-for-profit organizations and their goal is to assist consumers. Other debt solutions require you to work with for-profit businesses like lawyer firms and debt settlement companies.
Nonprofits typically charge fewer fees than for-profit businesses. Search theNational Foundation for Credit CounselingorFinancial Counseling Association of Americato find a counselor that fits your needs.
A single payment
One of the biggest benefits of a debt management plan is that you could get a streamlined, single payment.
A single payment can help you save money, as you’re less likely to miss a payment, incur late fees and face mounting interest. Moreover, the simplicity of dealing with one monthly payment, rather than several, will make your finances easier to manage.
A financial road map
The payment schedule sets a goal for you to reach and tells you how to get there. It provides a timeframe and you can see when you’ll eliminate your debt.
A DMP, with a payment due each month, will hold your fee to the fire, and make it less likely that you delay your debt payments.
A chance to improve your credit
The largest factor used to calculate your FICO credit score is payment history (35%), followed by amounts owed (30%), length of credit history (15%), credit mix (10%) and new credit (10%).
“Making those timely payments will typically improve your credit over time,” said Martinez-Orza.
You might also be able to re-age your credit accounts, changing their status to current, then your DMP payments will be recorded as one-time, and thereby incrementally improving your credit.
However, if your credit cards are closed, then your credit utilization may rise, which could negatively affect your credit.
Regardless, you need to take the longview: working down your debt will help your score in the long run.
Cons of debt management
A DMP isn’t always the answer and following through on one might not be easy.
It’s not debt elimination
It’s important to note that DMP doesn’t erase debt; you will still be paying it off. This can cause challenges if you’re not prepared.
“In many cases, consumers attempt a debt management plan, but eventually wind up filing bankruptcy because they can’t afford the payments,” said Fox.
Unsecured debt only
A DMP only applies to what you owe from credit cards, personal loans and other such unsecured debt. It doesn’t apply to things like mortgages and car loans.
Creditors have to agree
The businesses and people you owe money to don’t have to agree to waive fees or charge less interest. In most cases, they’re under no legal obligation to work with you and have the right to refuse to accept less money.
There are likely fees
You may need to pay the debt counseling agency that administers your plan.
“DMP fees vary based on your state of residence and debt amount,” says Martinez-Orza. For example, her agency charges a one-time set up fee and a monthly fee.
However, these fees could be minimal considering the amount of money you can save in reduced interest charges, waived fees and in preventing future financial problems.
No new lines of credit
Enrolling in a plan can also limit your ability to access ongoing credit. You typically aren’t able to take out a new home loan or car loan while you have a DMP.
Also credit cards enrolled in the plan will be closed as you pay them off, “although most creditors will usually allow you to use one credit card for emergencies,” Martinez-Orza said.
Debt management vs. debt consolidation
Debt management and debt consolidation have the same aims – to help you simplify your finances, reduce what you owe, stop collection calls and set you up for success. However, they differ in how they accomplish those goals and are better for different people.
In debt consolidation, you take out one new loan and use it to pay off all (or most) of your other debt that has higher interest rates. You then make monthly payments on the debt consolidation loan until it’s paid off.
Debt consolidation makes sense if you can both secure a lower interest rate than what you owe on your credit cards, and receive a big enough credit line.
The average credit card interest rate in March, 2023 was 24.10%, whereasthe best debt consolidation loanshave rates ranging from 6.99% to 35.97%.
Debt management vs. debt settlement
With a debt management plan you work with a trusted non-profit credit counseling agency to pay back all debt. By contrast, in a debt settlement situation, you work with a for-profit company and ultimately pay less than what you owe.
Debt settlement can severely impact your credit, you willlikely owe taxes on the amount of debt that is forgivenand debt settlement companies charge fees that range from 15% to 25% of your enrolled debt.
Alternatives to debt management
It’s important to select the debt relief strategy that works for you. Each of these options have their own pros and cons that you should consider carefully before committing.
- See if you’re eligible for hardship assistance.Many creditors andgovernment agencieshave options for people who are facing financial hardship.
- Get financial counseling.You can talk with a credit counselor and get help without signing up for a DMP.
- Do a balance transfer.Rather than keeping your credit card debt in an account that’s charging interest, transfer it to a credit card that has no interest or low interest. Here arethe best 0% intro APR credit cards.
- Use a debt payback method.To structure your finances, you can adopt a proven plan to attack debt with thesnowball method.
- Consider debt settlement.If things are looking bad and your credit score is already doomed, debt settlement might have more pros than cons.
- Look at bankruptcy.If things are really bad and there’s no feasible way out of debt, bankruptcy might be the answer. Be aware though that you must qualify for it and it’s not an easy solution.
Frequently asked questions (FAQs)
Yes, you can work directly with your creditors to request lower interest rates and waived fees. However, credit counselors typically have a better sense of the system’s ins and outs and have established relationships with creditors, which can provide a large benefit. Plus you’d be responsible for making on-time payments to multiple creditors.
A debt relief program could help you lower your debt, waive fees, stop collection calls, lower your interest rate and consolidate your payments into one payment. Ultimately, it should help you improve your credit score as well.
The specific drawbacks depend on the type of program you use, but can include the facts that many programs provided by third parties charge fees and that sticking with a payment plan over a period of years can be hard. Some programs don’t allow you to take out any new loans during this time and debt cancellation can be expensive with fees and taxes.
You want to be careful not to be taken advantage of by debt management scams. Martinez-Orza cited some telltale signs of a company to watch out for:
- They guarantee they will reduce or cancel your debt.
- You must pay in advance of them accepting your case or successfully negotiating a settlement.
- They insist you use an intermediary.
- They ask you to stop working with your creditors.
To identify a legitimate, reputable nonprofit credit counseling agency, check if the agency is accredited by the Council of Accreditation (COA)and a member of the National Foundation for Credit Counseling (NFCC). You should also check their ratings by the Better Business Bureau (BBB).
If you're sending money to creditors every month but it doesn't seem to make a dent in your debt, a debt management plan may help. Under a debt management plan, a credit counselor will help you set up a realistic plan, negotiate better terms with your creditors and roll your unsecured debts into one monthly payment.Is it good to have debt management plan? ›
If you're sending money to creditors every month but it doesn't seem to make a dent in your debt, a debt management plan may help. Under a debt management plan, a credit counselor will help you set up a realistic plan, negotiate better terms with your creditors and roll your unsecured debts into one monthly payment.What are the negatives of a debt management plan? ›
- your debts must be repaid in full – they will not be written off.
- creditors don't have to enter into a debt management plan and may still contact you asking for immediate repayment.
- mortgages and other 'secured' debts are not covered by a debt management plan.
Sometimes a creditor will refuse to deal with a DMP provider. This could be because the creditor doesn't want to accept the reduced payments or sometimes it could be because they've objected to you using a fee-charging provider, which would mean there's less money to pay the debts you have with them.What happens if you go on debt management plan? ›
A DMP is an informal agreement between you and your creditors for paying back your non-priority debts. Non-priority debts are things like credit cards, loans and store cards. You pay back the debt by one set monthly payment, which is divided between your creditors.How long after a debt management plan can I get credit? ›
How long does a DMP stay on your credit file? Debts will stay on your report for six years, starting from the date they're paid off or defaulted. A DMP means you'll repay your debts more slowly, so your score may be negatively impacted for longer.Can I pay off my debt management plan early? ›
As debt management plans (DMP) are quite flexible, you may find that you're able to pay off a DMP early by increasing monthly payments or paying a lump sum. Your DMP payment is worked out once your priority household bills, arrears and other living costs have been accounted for in your personal budget.Which debts can t you pay off with a debt management plan? ›
- court fines.
- TV Licence.
- Council Tax.
- gas and electricity bills.
- child support and maintenance.
- Income Tax, National Insurance and VAT.
- mortgage, rent and any loans secured against your home.
- hire purchase agreements, if what you're buying with them is essential.
Generally speaking, try to minimize or avoid debt that is high cost and isn't tax-deductible, such as credit cards and some auto loans. High interest rates will cost you over time. Credit cards are convenient and can be helpful as long as you pay them off every month and aren't accruing interest.Can you buy a car while on a debt management plan? ›
It's not against any guidelines to buy a car during your DMP. However, your DMP agreement is likely to state that you must not take out any additional credit without speaking to your DMP provider first. Before buying a car, it's important to make sure that the associated costs are realistic and affordable.
- Come to your workplace. Under the FDCPA, it's illegal for a debt collector to come to your workplace to collect payment. ...
- Harass you. Harassment from a debt collector can come in many forms: ...
- Arrest you for debt. ...
- Pursue you for debt you don't owe. ...
- Call you whenever they want.
Include all of your debts.
Make sure all of your debts are included in the DMP, even if you think you can manage that catalogue payment or want to keep your overdraft 'for emergencies'. Sometimes you might have missed a debt from your plan, so be sure to let your DMP provider know about any changes as soon as possible.
They cannot swear, threaten to illegally harm you or your property, threaten you with illegal actions, or falsely threaten you with actions they do not intend to take. They also cannot make repeated calls over a short period to annoy or harass you. Debt collectors cannot make false or misleading statements.What happens after 6 years on a DMP? ›
What happens when my DMP is finished? The debts associated with your DMP may still stay listed on your credit report until the six-year period is up from when they were added – if they have defaulted or there are CCJs associated with them, for example – but the marker for your DMP will be removed.How to rebuild credit after debt management? ›
- Pay Bills on Time. Pay all your bills on time, every month. ...
- Think About Your Credit Utilization Ratio. ...
- Consider a Secured Account. ...
- Ask for Help from Family and Friends. ...
- Be Careful with New Credit. ...
- Get Help with Debt.
Cancelling your DMP
To cancel your DMP, you need to contact your provider and ask to cancel. They will inform your creditors that the agreement has been cancelled, so you can expect to start dealing with them yourself again.
It is possible to get credit while on a DMP, and there may be circumstances in which it's advisable. But if you're on such a plan because you were having trouble making your payments on time, adding more debt while you're still in the process of eliminating your old debt is asking for trouble.Can I still use my credit card after debt consolidation? ›
Can I still use my credit card after debt consolidation? Certain types of debt consolidation will automatically close your credit cards, while other options, like a balance transfer credit card or HELOC, will not. If the account remains open and in good standing, you can use your credit cards after consolidation.Does a debt management plan close your credit cards? ›
You'll have to close any credit cards that you include in the DMP, which will diminish your access to credit throughout the month. Your creditors may also monitor your credit reports and require you to stop using credit cards that aren't part of the DMP while you're participating in the program.What's the most reliable way to pay off debt? ›
Pay off your debt and save on interest by paying more than the minimum every month. The key is to make extra payments consistently so you can pay off your loan more quickly. Some lenders allow you to make an extra payment each month specifying that each extra payment goes toward the principal.
Typically, most debt management plans last for 5-10 years. However, there is no standard length. It will depend on the amount of debt you owe and what you can afford to pay each month.Can I pause my debt management plan? ›
You can stop your DMP at any time, and you don't have to make a legal commitment when starting a DMP.What debts Cannot be forgiven? ›
Filing for Chapter 7 bankruptcy eliminates credit card debt, medical bills and unsecured loans; however, there are some debts that cannot be discharged. Those debts include child support, spousal support obligations, student loans, judgments for damages resulting from drunk driving accidents, and most unpaid taxes.What is the only debt that Cannot be forgiven? ›
No matter which form of bankruptcy is sought, not all debt can be wiped out through a bankruptcy case. Taxes, spousal support, child support, alimony, and government-funded or backed student loans are some types of debt you will not be able to discharge in bankruptcy.What type of debt can be forgiven? ›
Debt forgiveness is usually available for unsecured debts like credit cards, personal loans, or student loans. Secured debts like a mortgage or a car loan are not usually eligible for debt forgiveness. If you default on a secured debt, the lender will likely pursue foreclosure or repossession.Is $30,000 in debt a lot? ›
Many people would likely say $30,000 is a considerable amount of money. Paying off that much debt may feel overwhelming, but it is possible. With careful planning and calculated actions, you can slowly work toward paying off your debt. Follow these steps to get started on your debt-payoff journey.What is considered a lot of debt? ›
Debt-to-income ratio targets
Now that we've defined debt-to-income ratio, let's figure out what yours means. Generally speaking, a good debt-to-income ratio is anything less than or equal to 36%. Meanwhile, any ratio above 43% is considered too high.
Worse than being in debt is losing your peace.
Everyone experiences adversity. It's called being human. For some people that adversity takes the form of being in debt. The main thing is to keep your peace, to know that God is taking care of each of us, and to remember to trust Him to provide.
If you are struggling with debt and debt collectors, Farmer & Morris Law, PLLC can help. As soon as you use the 11-word phrase “please cease and desist all calls and contact with me immediately” to stop the harassment, call us for a free consultation about what you can do to resolve your debt problems for good.What is the 777 rule with debt collectors? ›
One of the most rigorous rules in their favor is the 7-in-7 rule. This rule states that a creditor must not contact the person who owes them money more than seven times within a 7-day period. Also, they must not contact the individual within seven days after engaging in a phone conversation about a particular debt.
The statute of limitations on debt in California is four years, as stated in the state's Code of Civil Procedure § 337, with the clock starting to tick as soon as you miss a payment.What debts are not included in debt to income ratio? ›
The following payments should not be included: Monthly utilities, like water, garbage, electricity or gas bills. Car Insurance expenses. Cable bills.Do you have to change banks with a debt management plan? ›
This is not only the case with a DMP but you should change your bank account if you are going to make reduced payments to a company that you also bank with. Banks have the “Right to Offset” so any money in your current account could be used to pay another debt with the bank.Can I pay the creditor instead of the debt collector? ›
It's possible in some cases to negotiate with a lender to repay a debt after it's already been sent to collections. Working with the original creditor, rather than dealing with debt collectors, can be beneficial.How do you outsmart a debt collector? ›
- Keep a record of all communication with debt collectors.
- Send a Debt Validation Letter and force them to verify your debt.
- Write a cease and desist letter.
- Explain the debt is not legitimate.
- Review your credit reports.
- Explain that you cannot afford to pay.
Your credit will take a hit
As soon as the delinquent account appears on your credit report, you can expect your credit score to take a nosedive. Even if you work out a payment plan with the creditor, there is a chance that the delinquent account will still ding your credit, even if just for a limited time.
- The More You Pay, the More They Earn. ...
- Payment Deadlines Are Phony. ...
- They Don't Need a 'Financial Statement' ...
- The Threats Are Inflated. ...
- You Can Stop Their Calls. ...
- They Can Find Out How Much You Have in the Bank. ...
- If You're Out of State, They're Out of Luck.
If you're in a DMP and paying down your existing debt, you might find yourself looking to apply for a new loan, such as a mortgage or auto loan. While being in a DMP may make it harder to get these loans, it will not automatically disqualify you.What is the minimum debt level for a DMP? ›
There's no maximum or minimum debt level needed to enter a DMP, but there are some things to consider before applying. A DMP is good for those who are struggling to keep up with their debt repayments, but who can afford to consistently pay smaller amounts over a longer period of time.Will a DMP close my bank account? ›
If you have no outstanding debts with your current bank you should be able to continue using the account you already have with them. However if you do owe money to them and intend to include these debts in your DMP, you will need to open a new bank account before you start.
- Get Your Free Credit Report. ...
- Know How Your Credit Score Is Calculated. ...
- Improve Your Debt-to-Income Ratio. ...
- Keep Your Credit Information Up to Date. ...
- Don't Close Old Credit Accounts. ...
- Make Payments on Time. ...
- Monitor Your Credit Report. ...
- Keep Your Credit Balances Low.
It could take several years to build your credit from 400 to 700. The exact timing depends on which types of negative marks are dragging down your score and the steps you take to improve your credit going forward.How long does it take to rebuild credit from 500? ›
For instance, going from a poor credit score of around 500 to a fair credit score (in the 580-669 range) takes around 12 to 18 months of responsible credit use. Once you've made it to the good credit zone (670-739), don't expect your credit to continue rising as steadily.Can I pay a lump sum off my DMP? ›
As debt management plans (DMP) are quite flexible, you may find that you're able to pay off a DMP early by increasing monthly payments or paying a lump sum. Your DMP payment is worked out once your priority household bills, arrears and other living costs have been accounted for in your personal budget.How to get out of 50k debt? ›
- Find a credit counseling agency with a good Debt Management Plan.
- Look into a Credit Card Debt Forgiveness Plan.
- Pick one of the many debt-reduction methods and “Do It Yourself”
- File for bankruptcy.
A Debt Management Plan is an agreement between you and your creditors to pay all of your debts. Debt management plans are usually used when either: you can only afford to pay creditors a small amount each month. you have debt problems but will be able to make repayments in a few months.What is the best way to clear debt? ›
- Informally negotiated arrangement.
- Free debt management plan (DMP )
- Individual voluntary arrangement (IVA)
- Debt relief order (DRO)
- Administration order.
- Debt consolidation and credit.
- Full and final settlement offer.