A Debt Management Plan allows you to achieve financial balance within your means with the cooperation of your creditors. It provides you the structure of making only one monthly payment rather than keeping up with several bills due at different times during the month. Through predetermined policies established with creditors, Debt Management Plan participants are often offered concessions that allow them to repay the accumulated debt over a shorter period of time, resulting in less total interest paid. Along with the convenience of one monthly payment and the opportunity for creditor concessions, other advantages of this type of program include: repayment of all unsecured debt within a maximum of 60 months; the stopping of harassing correspondence from creditors; one point of contact, and educational opportunities. Disadvantages may include a potential for the program to negatively impact your credit rating.
It’s important that you do your homework and research the debt management agency prior to doing business with them. Most if not all reputable credit counseling organizations are nonprofit or not-for-profit organizations, are members of their local Better Business Bureau, and are accredited affiliates of the industry trade organizations such as the National Foundation for Credit Counseling. Additionally, most have informative web sites that explain their philosophy, provide thorough and clear explanations of their programs, and provide educational opportunities to their clients. Credit counseling organizations teach you how to manage your money and offer you options on how to better manage your debt. Counselors are certified and are trained in areas of consumer credit, money management, debt management, budgeting, and often housing. Counselors will discuss your entire financial situation with you and help you develop a personalized plan to solve your financial problems.
If you choose the right program for your needs and have the income to complete it, a Debt Management Plan is an excellent method for resolving money management and debt issues.
Debt Reduction Options
When you work with a Debt Management Agency, the counselors may suggest several programs designed to help reduce your debt. Here are some examples:
- Debt Consolidation: This simple program is also the most popular. After an initial consultation, a counselor will contact your creditors and attempt to get your fees reduced and your interest rates lowered. The new balance is then combined into a single monthly payment. This payment is sent to the debt management agency, which disburses the funds to your creditors, minus any fees charged by the agency.
- Debt Consolidation Loans: You obtain a loan from a lender to pay off your unsecured debts, and make one monthly payment to that lender. Many of these loans are actually from credit card companies offering “consolidation loans.”
- Debt Settlement: You agree to have a reduced debt paid off in less than one year, or in a lump sum. The counselor may then be able to get your debts reduced by up to 50%. If you pursue this option, be sure to get the agreement in writing so as to reduce the likelihood of being charged later for the remaining balance not paid in the settlement. This will show as a “settled” account on your credit report, rather than “paid as agreed.”
- Mortgage Equity Debt Payoff: Under this program, you borrow from the equity in your house to pay off your unsecured debts. As we discussed earlier, this is most commonly done either by refinancing your home, or taking out a second mortgage.
Keep in mind that many financial advisers stress that in many cases, using a loan to pay off a debt is not a good idea, because you’re simply trading one debt for another. In the case of an equity loan, you could end up paying interest on that debt for the next twenty to thirty years, which will cost you significantly more than if you were to choose another method. You’re also taking an unsecured debt and turning it into a secured debt, so be sure you’re fully aware of the consequences and can repay the new loan.
The following link will guide you in your research in determining whether a debt management plan is right for you. This website will show you the important questions to ask when choosing a Credit Counselor.
The Federal Trade Commission (FTC): For People on Debt Management Plans: A Must-Do List