Finance

Debt Management Plan Pros and Cons – Options for Paying off Your Debts

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Debt management plan and repayment structure is a way to get your debt under control through financial planning and budgeting. But how do you get started with the best template? Its difficult right? Fear no more because Everything You Need to Know About Debt Management Plans is readily available in this article.

This is for people who are deep in debt and don’t know how to get out of it. If you are among that few, a debt management plan and payment structure could provide a life saving. All you have to do is to work with a credit counselor, from there you can design a repayment template plan. This can help you lower the interest rate on your debt. In-turn, this will give you a path to payoff and streamlines instalment payments.

However, “there are few downsides to a debt management plan. Yes, its true, especially when you compare it to other options, like; debt settlement or bankruptcy,”. Maliga Amy, a financial educator with Take Charge America, who’s a nonprofit credit counseling and debt management agency advises us in this article. From her advise; she gave some updates on how debt management plans work to help you decide whether a DMP (Debt Management Plans) could be right for you.

What Is a Debt Management Plan?

By definition from www.gov.uk, a Debt Management Plan is an agreement between you and your creditors to pay all of your debts. Basically, debt management plans are usually used when either: you can only afford to pay creditors a small amount each month. Many people have debt problems but with the DMP, you will be able to make repayments in a few months.

Generally, a debt management plan from a nonprofit credit counseling agency combine your unsecured debts into a single affordable monthly payment. This is to pay off what you owe in 3 to 5 years time. As you earn from your salary, you can make a payments to the credit counseling organization. They will in-turn, distribute the money every month to all your creditors.

Please notice that, even though these plans are offered by nonprofits, there services are not free of charge. With that in mind, be informed that a debt management plan may have a setup fee as well as service charge or a monthly fee.

Wetzeler Allison, a certified credit counselor with Consumer Credit of Des Moines has this to say; “While nonprofit agencies offer their counseling services free of charge, there is a service charge fee for most debt management plans,”

Service Charge Fees mostly depends on your current debt, your budget as well as regulations in your state. However, Wetzeler also added they are usually “far less than the interest you will save” on the plan.

Do creditors usually accept Debt Management Plans?

Yes they do. In fact, creditors are not obligated to accept a debt solution but they could accept a Debt Management Plan if they feel this is the best way for them to recover the money you owe them. However, the debtor has to provide concrete but fair offer of repayment to the creditors. therefore, you have to carefully outline how much you can afford to pay back by the end of every month. Now, lets move to the next stage; how does a Debt Management Plan work in banking?

How Does a Debt Management Plan Work?

Hmm… the very first step to take is to thoroughly review your financial situation with a nonprofit credit counselor. It is important you think before you agree to any debt management plan. In the long run, this will help the DMP counselor to design a template or repayment plan that meets your needs.

Don’t think that a DMP typically reduce the amount of debt you owe. No, it doesn’t. But the credit counseling agency will likely negotiate on your behalf with your creditors to increase the time you have to pay off the debt. this will in-turn, lower your monthly payments. With this plan, your creditors may likely agree to reduce your interest rate or even waive certain fees.

Be mindful that only unsecured debts can be included in a debt management plan. Some of the debts that might be part of a debt management plan include:

  • Credit card bills.
  • Medical bills.
  • Personal loans.

Debtors are to note that debt management plans can take up to 48 months or longer to complete, according to the Federal Trade Commission Acts. However, Amy Maliga says that payoff times can be much shorter in some cases.

She also added that; “Most individuals on these plans can pay their credit card debt, in full, in five years or less,” she says. “Many people even pay it off in as little as 2years.” The downside is that you may not be able to apply for credit while the plan is in place, the FTC says.

While that is still fresh in our minds, you must adjust from using credit cards regularly to living a cash-only lifestyles. That is if you enroll in a debt management plan, make cash payments for all purchases & transactions. All these are quite challenging initially, but breaking the credit card habit and spending only what you can afford is a key concept of living a debt-free life. This is a fact.

How to Enroll in a Debt Management Plan

You can begin by identifying a reputable nonprofit credit counselor in your local community. Make sure you locate DMP candidates through the National Foundation for Credit Counseling and the Financial Counseling Association of America. Be sure to check their reputation with your state attorney general or the Better Business Bureau. You can also seek advise from your attorney.

According to the Consumer Financial Protection Bureau, these are some questions to ask to find the best credit counseling service;

  • Do you offer in-person counseling?
  • Do you have free educational materials?
  • What fees do you charge?
  • Can you provide help if someone can’t afford to pay the fees?
  • Is your organization licensed in this state?

Make sure to carefully choose your counselor. The Federal Trade Commission warns that some nonprofit credit counseling agencies charge very high fees. They also informs us that some these DMP companies has some hidden costs.

FTC advises that you don’t agree to a debt management plan unless you have talked with a credit counselor about your financial situation. You must have also worked on a plan to deal with your money problems.

Therefore, you have to talk with a counselor in person and physically. Its your choice to talk over the phone or online, but person-person conversation is the best. Before meeting your counselor, prepare by reviewing your credit reports. If you can still access them for free online, making a list of your debts and memorize them.

Pros and Cons of Debt Management Plans

Advantages / Pros

  • You can save money if your debt management plan reduces your interest rate and waives fees.
  • It can help you pay off the debt typically within five years.
  • Make one payment to the credit counseling agency instead of multiple creditors.
  • It cause little or no damage to your credit than with debt settlement or bankruptcy.

Disadvantages / Cons

  • First, you may lose access to credit cards until your debt is paid off.
  • There are some creditors who do not participate in debt management plans.
  • When applying, you can’t include debts secured by collateral, such as your home or car.
  • Lastly, you may not be able to take out new credit/loan when on the plan.

Does a Debt Management Plan Affect Your Credit?

Yes it does. However, a debt management plan could hurt your credit in the short term but help it in the long run. Sometimes, you may come to a time you have to close accounts in a debt management plan, which can affect your credit score.

As can be seen above, this can cause a fall in your credit score,” Wetzeler says. “Judging from previous experiences, most reliable people see an increase in their scores as creditors will continue to report on-time monthly payments.”

By the end of a debt management plan, consumers typically emerge in a much stronger position, Maliga says.

“Many clients finish their debt management plans with their credit in great shape to buy a home or meet other financial goals,” she says.

On the whole, you can build a positive payment history, an important credit scoring factor, and will repay your accounts in full to the creditor.

Alternatives to a Debt Management Plan

For anyone who decides that a DMP (Debt Management Plan) won’t work for them, you can consider one of these DMP alternatives:

1. Debt consolidation loan

The debt consolidation is a type of loan that rolls multiple debts into a single fixed amount. However, a debt consolidation loan might can only make sense if the interest rate is lower than what you are paying on your individual debts.

2. Debt snowball method

Most debt management conselors prefer the debt snowball method. Here, you pay off debts from smallest to largest. This is because, immediately the smallest debt is paid off, you apply the funds you were putting toward that debt to the next-smallest debt and keep repeating the step again.

3. Debt avalanche method

This debt avalanche is similar to the snowball method as a template. Here, you start by paying off the card with the highest interest rate. From there, you can work your way down to the card with the lowest rate. However, both methods can be effective, but people need the drive plus discipline to stick to these plans. They do not have to continue using their credit cards as they work to pay off the debts.

4. Debt settlement

Most people like this type of DMP because debtors may consider negotiating with your credit card companies to settle for less than what you owe. Also, a debt settlement attorney or company can negotiate but will charge service fees. You may at the end owe taxes on discharged debt. In the long run, settlement can damage your credit and is considered a last resort before bankruptcy.

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Is a Debt Management Plan Right for You?

it is important to know that debt management plans are not for everyone. But for some other persons, they can be the key to breaking the cycle of debt. Wetzeler says the best candidates for a debt management plan:

  1. Pay high interest on credit cards. “You don’t have to be late or past due to qualify for a DMP,” she says.  
  2. Juggle multiple creditors. A debt management plan makes sense if you want to consolidate so that you have just one payment each month.    
  3. Have maxed out or approached their credit limits. “Maxing out your credit card increases your credit utilization ratio, which is one of the bigger factors in your credit score,” Wetzeler says. Lastly, financial experts recommend keeping the ratio – the percentage of total available credit you’re using – below 30%.