Many Americans have too much debt. They are overwhelmed by the amount they owe and have a hard time making the payments they need to help get themselves out of debt.
In these types of situations, households can benefit from plans to help them manage their debt.
However, not every program is right for every financial situation. For instance, rather than moving forward with a debt settlement, some individuals may benefit more from visiting a credit counseling agency.
Regardless of your situation, there is a debt management solution that is best for you. Certain plans are better for specific types of debt while others are better for others. One of the most common strategies you can use is to enroll in a debt management plan.
To learn more about debt management plans and how they may be able to help you, continue reading the sections below.
What are debt management plans?
A debt management plan is one solution for debt relief. If you have substantial amounts of credit card debt, a debt management plan (DMP) might be the best option for you. Medical bills and student loans are examples of debts that are not eligible for a debt management plan.
If you take advantage of a DMP, credit counselors work with debtors and creditors to negotiate a new, manageable payment plan so you can work toward eliminating your debt.
Specifically, DMPs make it so your various types of credit card debt are consolidated into one monthly payment. This way, clients only have to make one monthly payment instead of several. Counselors also usually are able to negotiate for terms that give their clients lower interest rates with these new payment plans. As a result, residents can afford their payments.
In exchange for these new payment plans, clients usually need to agree to pay off their debt in a shorter period of time. Usually, these plans last between three and five years.
After creditors and debtors agree on a plan, debtors can begin making their payments. However, these payments are now made to the credit counseling agency who then pays the creditors.
Moreover, debt management plans are offered by non-profit credit counseling agencies rather than for-profit organizations. These agencies are accredited by the National Foundation for Credit Counseling so that clients can ensure their legitimacy. Clients may be eligible to obtain many services for free or at low costs from credit counseling agencies.
Initial consultations are typically free of charge. However, you may be required to pay a fee for subsequent services. If you are undergoing financial hardships, you may be able to get these fees waived or reduced to make the amount you owe more manageable.
Resources for Debt Management
- Information about consolidation of student loans
- American Consumer Credit Counseling: Debt Management Services
- Financial Counseling Association of America
What are some common DMP drawbacks?
There are many different debt management plans that you can take advantage of. However, some of these plans come with different risks. This means you need to take time and make sure you’re using a plan that would provide you with the relief you need.
Before you decide on a DMP, make sure you take various factors into consideration. Otherwise, you may end up being in more financial trouble than before.
Some of the downsides to using a DMP include the following:
- DMPs may only work for certain types of debt. If you’ve got a type of debt that isn’t typically covered through a DMP, this recovery option wouldn’t help you.
- You may not be able to open new credit lines when you are using a DMP. If you found yourself in a situation and needed to open a credit card while you’re in a DMP, you might not be able to.
- You are tied to a strict payment schedule to pay off your debt. Even if an emergency arises, you’re tied to the terms of your DMP until you pay off what you owe.
You can rely on credit counselors to help you navigate this tricky financial situation. If you are concerned about your financial health, consider speaking with one of these workers to figure out which plan is best for you.
Who should consider a debt management plan?
Certain residents are ideal candidates for debt management plans. Those with credit card debt who struggle to make their monthly payments may be perfect for this method of debt management.
However, residents who have very large amounts of debts that cannot be repaid within five years may not be eligible for a debt management plan. Likewise, residents with a small amount of debt who do not need assistance from a credit counseling agency may not benefit from such a plan.
Counselors typically recommend debt management plans for residents who:
- Owe debt that is between 15 and 49 percent of their yearly incomes.
- Do not need to open a new line of credit to repay their debts.
- Have a steady income and will be able to repay their debts within five years.
The best way to ensure that a debt management plan is the most appropriate option is to consult with a nonprofit credit counseling agency. This is because credit counselors are able to offer professional advice about finances and effectively examine a client’s situation.
Debt Management Plan Alternatives
Debt management plans can be a very effective method for debt relief for many debtors. However, other options may be more helpful for others. That is because debt management plans are not able to address all kinds of financial issues and debts, such as student loans.
Furthermore, individuals who have very large amounts of debt or very small amounts of manageable debt should not consider debt management plans because they may not even qualify for this option.
The following are other debt relief strategies that individuals could look into:
- Declaring bankruptcy – Individuals with debts that total more than 50 percent of their yearly incomes and who cannot pay them off within five years may want to consider filing for bankruptcy. This method allows debtors to have a fresh financial start. However, it can heavily damage credit, and participants cannot begin rebuilding until approximately six months after filing.
- Do-it-yourself debt management – Those with debt that is less than 15 percent of their yearly income should consider a DIY method such as a debt avalanche.
- Consolidating debt – This strategy helps residents reduce monthly debt payments and consolidate all debts into a single payment. However, debtors are required to take out another loan to pay off all of their debts.