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Debt management plans are debt reduction solutions that help individuals and families pay off their debts. This debt relief strategy allows people with unsecured debt to pay off their debt more effectively if they're having trouble paying as originally agreed.
You can develop a debt reduction plan on your own, but debt management plans are typically created and maintained by a credit counselor with a credit counseling agency. Once the plan is in place, you typically make one monthly payment to the agency, which then distributes payments to your creditors. Credit counselors can also negotiate with your creditors to get you a lower payment, interest rate or both.
When to Consider a Debt Management Plan
If you reach a point where you're overwhelmed by credit card debt and unable to keep up with payments, a debt management plan (DMP) is an option that can be considered before debt settlement or bankruptcy. A DMP may also be a good option if your credit isn't in good enough shape to consolidate your debt.
With debt consolidation, you use a personal loan or balance transfer credit card to consolidate credit card debt, preferably at a lower interest rate, to save money and make payments more manageable.
However, debt consolidation loans and credit cards typically require good or excellent credit to make it worth it. If you have fair or poor credit, you'll have a hard time qualifying for a balance transfer card, and interest rates on available personal loans may be too high to consider.
The goal of debt settlement, on the other hand, is to settle with your creditors for less than what you owe, and it's generally best suited for someone who's already significantly behind on payments. Bankruptcy is generally a last resort option. Both debt settlement and bankruptcy will do lasting and serious damage to your credit.
A debt management plan can be a good alternative that may have a less negative effect on your finances and credit. Take your time to consider whether a debt management plan is right for you. Consider consulting with a credit counselor to get an idea of what the next steps with your debt should be.
How to Create a Debt Management Plan
The first step to establishing a debt management plan is finding a reputable credit counseling agency that will review your financial situation and help you choose the best path forward. It's important to look for nonprofit agencies with certified credit counselors to ensure that they will actually help you and not take advantage of your debt situation. You can find accredited nonprofit credit counseling agencies through the National Foundation for Credit Counseling or the Financial Counseling Association of America.
Once you find a credit counseling agency you want to work with, make an appointment for a free consultation. A credit counselor can review your current financial situation and help you determine whether a DMP is right for you.
The debt management plan process usually includes obtaining debt information from all of your unsecured creditors. Then the credit counselor will work with your creditors to come up with an alternative repayment schedule and possibly also negotiate more favorable terms for you, such as a lower interest rate or reduced monthly payments.
Once the details are agreed upon, you'll start making monthly payments directly to the credit counseling agency, which will distribute payments to your creditors. DMPs typically take three to five years to complete, and you'll need to make sure you stick to the agreement; otherwise, the debt management plan may be voided, and you'll need to start making payments based on your original agreements.
During this time, your credit card companies will typically close your accounts, and you may not be able to open new credit card accounts as part of the agreement.
There's typically a one-time fee to set up your debt management plan, as well as a monthly fee. Speak with your credit counselor to learn how much that will cost.
How Does a Debt Management Plan Affect Your Credit?
Debt management plans can help you get out of debt by making monthly payments more affordable. However, because the process includes closing accounts, which decreases your total available credit, it can also hurt your credit score in the short term by increasing your credit utilization rate.
The fact that you're on a debt management plan won't impact your credit, but your creditors may add a notation to your accounts on your credit report, and future prospective lenders may see those and use that information to decide whether or not to extend credit to you.
A good first step when considering a debt management plan is to review your credit score and credit report and get a good picture of your current debt. You can obtain your Experian credit report and credit score for free.
With that information, you can determine if debt consolidation is an option for you and whether that might be a better choice. If paying down debt on your own isn't feasible, set up an appointment with a nonprofit credit counseling agency to get personalized expert advice.
Throughout the process, continue to monitor your credit to keep track of how your actions impact your credit score and to address potential issues as they arise.