Are you currently struggling to find a solution to an overwhelming debt problem? Have you been wondering if a debt management plan will be right for you? Learn more about a debt management plan and find out whether this is the best course of action you can take to become debt-free.
What is a Debt Management Plan and How Does It Work?
A debt management plan, or DMP, is a debt relief option that allows borrowers to pay off their debts at a rate they can manage and afford.
A DMP service is typically provided by credit advisors or a credit counseling agency. If you are considering a debt management plan, it is important to find a reputable and trusted credit counseling service .
The credit counselor will help you thoroughly review your financial situation and discuss further debt relief options. Once it is determined that a debt management plan is the best action to take, the credit counseling agency will try to negotiate with your creditors to see if they can reduce your monthly payments or interest rates, and waive or reduce any fees or penalties.
Both parties will then agree upon a simplified payment plan which you will be obliged to follow to pay off your debt. Typically, the payment plan will allow you three to five years to resolve your debt.
The Advantages of Debt Management Plan
A debt management plan can offer the following benefits:
- Consolidation of multiple debts without the need for another loan.
- Helps you achieve a more manageable payment plan. • Stops intimidating phone calls and letters from collection agencies.
- Creditors might agree to freeze interest payments or reduce fees and monthly payments.
- Helps you ultimately get rid of your debt and gives you the chance to improve your credit and your financial health as a whole.
The Downsides of Debt Management Plan
A debt management plan also comes with inherent risks and disadvantages, including:
- A DMP is typically an informal agreement, which means your creditors can change their mind at any time.
- It will still negatively affect your credit score.
- A DMP will increase the length of time it takes you to eliminate your debt – and you may end up paying more than the original amount you owed over time.
- Creditors may not always agree to freeze interest rates.
- There’s no guarantee that wage garnishment will be avoided unless your creditors agree to stop it.
Important Things You Must Know About DMPs
Here are some important things to consider about a debt management plan:
- A debt management plan won’t cover secured debts and other complex debts including court fines, child support, mortgage loans, auto loans and home equity loans.
- A DMP may help you pay off most unsecured debts such as credit cards, medical bills, personal loans, and payday loans.
- Always check if your DMP provider is authorized and certified. Credit counseling services will perform counseling sessions at no cost. Typically, there will be a one-time enrollment plan and minimal monthly fee for the cost of administering your debt management plan.
- In most cases, you will be required to close all credit cards (sometimes you may be allowed to use only one card in case of emergency) while enrolled in a DMP.