Thinking of using a debt management plan? It’s smart to look into debt management program pros and cons first. You’ve got to know what you may be getting into, and what to avoid.
Because like everything else, there are advantages and disadvantages to debt management plans.
So let’s go over the benefits of using one first.
Pros of Using a Debt Management Program
The pros are pretty clear:
1. You Have Someone to Help You
If you sign up for a debt management program, you’ll meet with a financial counselor at a non-profit. This can feel like a relief because someone else will lay out a plan for you. After that, all you have to do is follow the plan.
And there’s no need for a good credit score to take part. It may also help you avoid bankruptcy. Having a solid plan that works is one of the pros for sure, and of course paying off debt is great!
2. You May Spend Less in Interest and Fees
Some creditors may agree to charge you a lower interest rate while you’re in the debt management program. So your current interest rates may go down. This could help you pay it off faster.
Some creditors may also get rid of fees or finance charges. If they do, that could speed things up.
And you’ll know when all the debts in the plan will be paid off, as long as you stick with it.
3. There’s Less Stress
Debt management programs are one of several tools out there to help you get out of debt. The program will negotiate with your creditors for you so you don’t have to.
Because the plan is all managed by one organization, there’s less risk of missing deadlines or forgetting a payment.
The debt payments may be more manageable because they’re set up on monthly payment plans. This allows time to pay off debts without feeling pressured due to mounting interest rates.
Being in the program may stop harassing phone calls and letters from creditors. (Here’s another way to stop collectors from harassing you.)
So there’s less stress overall.
4. You Just Make One Payment
You’ll only have to make a single monthly payment to the debt management company. That payment will cover the debts that are in the program. (Which may not be all your debts.)
This can help if you have ADHD like me or you miss deadlines a lot.
5. You Can’t Use Your Credit Cards
Another pro is that the debt management program will make you close all your credit cards.
That’s right, if you enroll in a debt management plan you’ll have to close all your credit cards. And you can’t open new ones as long as you’re in the plan. You may also have to agree to not take on other new debt while you’re in the program, such as a car loan.
Some people might consider not being able to borrow like that a con, but it’s actually a pro. Why? Because it can help you to change your habits. That way you won’t rely on credit cards when you’re done with the plan.
That’s a pretty big list of debt management plan advantages, but the cons list is long as well.
Cons of Using a Debt Management Program
Everything has a flip side, right? So let’s go over some of the cons of debt management programs next, starting with some of the biggest disadvantages.
Debt management program cons include:
1. Debt Management Programs Cost Money
You usually pay fees to be part of the program. That money could be going to your debt instead if you did it yourself.
While reputable debt management programs are run by non-profits, they still cost money. (Non-profit doesn’t mean they don’t charge!)
You also have to be careful to choose a non-profit that does not keep your first payment as a donation. That could be a big chunk of change. Again, that’s money that could be going toward repaying your debt instead!
2. Not All Debt Management Programs Are Legit
You’ll need to make sure you’re in a real debt management plan.
Sometimes people think they’re in one, when really they are just paying someone to not pay their debts for them and then try to negotiate. That is not a debt management program.
There are scams out there as well, so be careful. (If you spot one, report it to the FTC.)
3. Not All Kinds of Debt Can Be Part of a Debt Management Program
You can usually only use the programs for unsecured debts. (Such as credit cards, small medical bills, and debts that are in collections.) So they aren’t useful if your debts have something backing them up (like a car loan, for example.)
4. Not All Creditors Will Accept the Program or Charge Less
Even if you do only have unsecured debts, there’s no guarantee that all your creditors will take part. They might, but they don’t have to.
They also don’t have to agree to charge you a lower interest rate or get rid of fees or finance charges. So you may not be saving any money.
And if the fees for being in the program are high, it could cost you more to be in it than you might otherwise save.
5. A Debt Management Program May Not Be the Fastest Method
You might be able to get out of debt faster using a different way. That’s due to a couple of things:
- the debt management plan may not start right away
- you might be in the program for up to 5 years
Since the plan length depends in part on your income, it could take you longer to pay off your debts than with other methods. I know I could have paid off my credit cards a LOT faster using a debt snowball than using a DMP.
Plus depending on the agreement you sign, it may also be hard to get out of the plan early. That can be a problem if you find a faster way to pay things off or need to declare bankruptcy.
6. The Relief You Feel May Be a Problem
The relief you may feel from having someone else handle things can be a problem.
Why? Because it may stop you from making real, lasting change. The kind of change that’s needed to stay out of debt.
So if you do decide to go with a debt management program, do other things as well. Build an emergency fund for starters. Then plan & track your spending. Because just like with other plans, debt management plans work best when used along with other strategies that help you get your money in order.
7. They Don’t Get Rid of Payments
You still have to repay your debt while in the plan. So if the reason you’re looking at a debt management plan is that you can’t pay what you owe, that’s a huge downside. If you can’t make the regular monthly payments, the program won’t work.
8. Debt Management Programs May Make Your Credit Worse
Paying down high balance debt and making timely payments can help your credit score. But if things go wrong, being in a debt management program may make your credit worse.
To learn more about how that could happen, read “Do Debt Management Programs Affect Your Credit?”.
So Do the Pros Outweigh the Cons?
Do the advantages of a debt management program outweigh the disadvantages? That depends on your situation, and what you want to do. But by knowing the debt management program pros and cons, you can make an informed decision.
If you are leaning toward using one, be sure to read more details on what a debt management plan is first. There’s a lot more info in there on how they work and what to keep an eye out for.
Remember too that there ARE other ways to get out from under the burden of debt. (My favorite is the debt snowball method. It’s what we used to pay off over $147K.) And it is sooo good to be debt free!