If making the minimum monthly payments on your unsecured debts is a challenge, a debt relief program could assist. While debt settlement and bankruptcy are options, a debt management plan (DMP) may be a better fit. You’ll repay your creditors in full in three to five years and possibly avoid significant damage to your credit health.
A debt management plan (DMP) can help you pay off unsecured debts faster. They’re offered by non-profit credit counseling companies who negotiate with your creditors to secure concessions, like reduced interest rates and waived fees.
Creditors also agree to a modified repayment plan but will usually close your cards. You also generally cannot open new credit cards while you’re enrolled.
You will make the monthly agreed-upon payment to the credit counseling agency. The agency will then forward payments to your creditors until your debts are paid off.
Not all debts are eligible for DMPs, though. Credit cards, personal loans and other unsecured debts can be included in DMPs. However, debts secured by collateral, including auto loans and mortgages, and student loans aren’t allowed under these plans.
Credit Counseling Solutions
How Long Does a Debt Management Plan Typically Last?
Most DMPs are designed to be completed in 36 to 60 months. The maximum time for and debt management plan is 60 months. However, it could less time to finish the program, depending on your debt load and monthly payments.
However, falling behind on payments could result in your removal from the program.
What Happens After You Complete a Debt Management Plan?
After completing a DMP, you cease monthly payments to the credit counseling agency. It’s also ideal to continue taking the actions recommended by your credit counselor to manage your money more effectively and avoid racking up more debt.
You can apply for new credit cards once you complete the program.
Does a Debt Management Plan Affect Your Credit?
Signing up for a DMP won’t directly affect your credit. However, your credit utilization may increase when accounts are closed, which could ding your credit score. The upside is your accounts may be brought current, and timely monthly payments will work in your favor over time. Since credit history accounts for the largest percentage of consumer credit scores, the effect of a DMP is generally positive or neutral on a consumer’s credit.
There are key advantages and drawbacks of DMPs to be aware of.
Key Benefits of Debt Management Plans:
- Streamlines repayment process: You’ll get a single, reduced payment each month to alleviate the stress associated with struggling to pay multiple creditors.
- Pay off debt faster: The concessions you get with DMPs make it easier to pay off debt faster, assuming you can keep up with the agreed-upon monthly payments. Most consumers who successfully complete DMPs finish in just three to five years.
- Credit consequences: DMPs generally do far less harm to your credit health over time than other forms of debt relief, like debt settlement. Plus, timely payments made to creditors each month will strengthen your payment history and help improve your credit score over time.
- No collection calls: If you can enroll in a DMP that works for your budget, the collection calls will stop when the creditors start receiving payments from the credit counseling agency.
- Creditors may re-age your account: This is done to bring your accounts current. Most creditors will agree to bring past-due accounts current after three payments.
Key Drawbacks of Debt Management Plans:
- Fees: While fees are low compared to other solutions, such as debt settlement, you will pay at least some fee as part of each monthly payment.
- Access to credit: Your credit cards will likely be closed by the issuers, and you’ll have to wait until the DMP is complete to get new credit cards. However, you can apply for secured loans, such as a mortgage or car loan, while you are enrolled.
- Termination risks: If you fall behind on payments, you could lose your concessions or be removed from the program.
Credit Counseling Solutions
It varies by credit counseling agency, although fees are regulated by state where you reside. You will pay a one-time setup fee and a monthly administration fee for the program. Monthly fees are included in your debt management plan payments. They are capped at $79 nationwide and average $49.
Wondering how DMPs compare to debt settlement programs, debt consolidation loans or bankruptcy? Here’s some additional insight to help you make an informed decision:
Debt Management Plan vs. Debt Settlement Program
Do you have more than 50 percent of your gross annual salary in unsecured debt? Or perhaps you don’t see yourself getting out of debt in the next five years, even with steep cuts to your budget? Debt settlement may be a more viable option. A for-profit company will negotiate settlement offers on your behalf and charge you a fee each time a settlement is reached. You could also be on the hook for taxes on the portion of the debt that’s forgiven. Also, keep in mind that most consumers who enroll in these programs forgo payments to creditors to speed up the process. Instead, they make payments to a dedicated account that’s used to pay settlement offers.
Word of caution: debt settlement should be used as a last resort as it can damage your credit score.
Debt Management Plan vs. Debt Consolidation Loan
A debt consolidation loan is a viable option to resolve your debt, particularly if you want to keep your credit cards open. It entails rolling multiple unsecured debts into a new loan product with a lower interest rate. You’ll need good or excellent credit to qualify. It’s equally vital that you remain disciplined enough to avoid using the cards you pay off.
Debt Management Plan vs. Bankruptcy
Consumers who can’t meet the minimum monthly obligations on their debts or a DMP may sometimes resort to bankruptcy to wipe away their balances. Filing bankruptcy could mean giving up your assets or entering into a repayment plan for three to five years to get your debt discharged. Either way, your credit score will take a significant hit. So, exhaust all other options and consult with a bankruptcy attorney if you’re thinking about filing.
Before enrolling in a DMP, consult with a reputable credit counseling agency to ensure it’s a good fit. Start by reaching out to Consolidated Credit, a 501(c)3 non-profit counseling agency with nearly 30 years of industry experience. It’s also accredited by the ANSI National Accreditation Board and Better Business Bureau (BBB) with an A+ rating.
During the initial call, a certified credit counselor will review your financial situation and help you devise a plan to manage your money and debts more strategically. Your counselor will also suggest other forms of debt relief that may be sensible, including DMPs. The call is free and should only take 30 minutes to an hour of your time.
If you decide to move forward with a Debt Management Program, the Consolidated Credit team will work with you to iron out your payment plan details. And upon enrollment, they will begin contacting creditors to stop late fees and secure lower interest rates.