If you have a bunch of different unsecured debts, there are several ways to pay them off. For example, you might consider a debt management plan (DMP).
The plan can usually be used for credit card debt, small medical bills, and debts that are in collections.
I’ve used one myself many years ago. My ex and I set up a debt management plan for our credit card debt.
It did work for us, but if I’d known then what I know now, using a debt snowball would have been faster in our case. Of course, you don’t know what you don’t know!
So What Is a Debt Management Plan?
A debt management plan is a plan for repaying your creditors that’s put together by a non-profit. The non-profit works with both you and your creditors.
In short, as part of the service a financial counselor takes a look at your debts. The counselor works with you and the creditors that agree to take part. The counselor comes up with a plan for paying off your debts over a set period of time. You deposit money with the non-profit, and they handle making the payments for you.
They may charge a monthly fee for being in the DMP, and maybe a small setup fee too. Make sure you understand exactly what the costs will be, and when you will need to pay them. You shouldn’t need to pay anything until they provide a service for you.
How Does a Debt Management Plan Work?
The process usually works like this:
- You make an appointment at one of the non-profits that offer debt management plans. (Your meeting might be in person, online, or over the phone.)
- They’ll ask about your household income, monthly expenses, budget (if you have one), and your debts. So you’ll need to have a list of your bills & monthly expenses, your pay stubs, and any recent statements from your credit cards & other debts on hand.
- They’ll review your situation with you and come up with a plan. They’ll based it on your credit report, budget, what you owe, and anything the places you owe money to may agree to do. If a creditor doesn’t want to participate, they don’t have to. But normally you’ll still have to include the debt in your plan. It’ll probably take about an hour for this part.
- While you’re in the debt management plan, you make a single payment each month to the non-profit in charge of the plan. Then they pay your creditors, who will know you’re participating in the DMP.
- You’re in charge of checking the statements from your debts each month to make sure everything gets applied correctly, etc.
As a part of the plan, normally you’ll have to close all of your credit cards and other lines of credit. So you aren’t allowed to continue using your credit cards if you enroll in a debt management plan. You also aren’t allowed to open any new ones while the plan is in effect.
(If you’re worried about this, here’s what you need to know about closing credit cards..)
Debt Management Plan Pros and Cons
Like everything, there are advantages and disadvantages to debt management plans. Let’s go over the benefits of using one first.
Pros of Using a Debt Management Plan
The pros are pretty clear:
- You meet with a financial counselor at a non-profit.
- It can feel like a relief to have someone else just lay out a plan for you.
- You make a single monthly payment, which can help if you have ADHD like me.
- Some creditors may agree to charge you a lower interest rate while you’re in the debt management plan. So your current interest rates may go down.
- Some creditors may get rid of fees or finance charges.
- You know when all of the debts in the plan will be paid off, as long as you stick with it.
- You have to close all your credit cards and can’t open new ones.
- There’s no need for a good credit score to take part.
- It may help you avoid bankruptcy.
- Paying off debt is great!
But of course, there are cons to using a debt management plan too. Let’s go over those next.
Cons of Using a DMP
Everything has a flip side, right? The cons of debt management plans are:
- It could take you longer to pay off your debts than with other methods.
- They may not start right away.
- You usually pay fees to be part of the program, so it costs you money. That money could be going to your debt instead. Non-profit doesn’t mean they don’t charge!
- You 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.
- You’ll need to make sure you’re in a legit 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 plan.
- The relief you may feel from someone else handling things can be a problem. Why? Because it may stop you from making real, lasting change. (Which is what’s needed to stay out of debt.)
- Not all creditors will agree to charge you a lower interest rate or get rid of fees or finance charges.
Other Things You Should Know About Debt Management Programs
Tell someone you’re signing up for a DMP, and they’ll probably tell you not to do so because it will affect your credit.
But that may or may not be true, and it depends in part on who you owe and what your credit is like now.
Sometimes creditors will report that you are not paying as agreed when you’re in the plan. (Even when they agree to accept the plan.) If that happens it can lower your credit scores. They may also add a note to your credit reports that says you have a payment arrangement with them.
However, paying down debt as agreed and reducing high credit card balances can also affect your credit for the better.
So it could be a negative or a positive. Either way, if you wonder if a debt management plan can affect your credit, the answer is yes.
Is a Debt Management Plan Right For You?
Of course it will depend on you. But in general a debt management plan can be good for someone who:
- wants someone else to come up with the plan
- wants to know they’ll be out of debt in a set time if they follow the plan
- prefers one monthly payment for a set period of time
If it’s appealing to pay a fee to only have one monthly payment, it could be a good fit. Especially if you’re more concerned with getting out of debt period vs. getting out of debt faster.
How long a debt management plan lasts will vary. It depends on how much debt you have and how much you can really afford to pay. But it normally lasts several years. Ours lasted about 3 years, but they can last longer than that too.
When is a debt management program not the best choice? It’s probably not a good fit for someone who:
- can easily make their monthly payments
- wants to focus on one debt at a time or on a particular debt first
- wants to pay things off as fast as they can
Sometimes slow and steady wins the race though. It really depends on your personality, money situation, and how good you are at sticking with things.
Either way, it’s a good idea to check out these common alternatives to a debt management plan.
How to Sign Up for One
If you decide to go with a debt management plan, signing up for one is fairly easy.
Start by searching for non-profits that offer them. (National Foundation for Credit Counseling, CESI, and CCCS are a few.) Check their reviews, rates, and services for your state, because it can vary depending on what office you go to.
Then contact them for more info on how to enroll. You’ll set up your meeting, make sure you’re clear on things, and get started if it is a fit.
The Bottom Line
Working with a non-profit to use a debt management plan lets you make one monthly payment for your consumer debts. It may cut interest and fees, but you may have to pay a monthly fee to take part.
So you’ll need to weigh the pros and cons for yourself. If you choose to go with one, make sure it’s reputable. And be sure you understand what you have to do and what it will cost before you agree to join.
No matter what you decide, you’ll need to make changes in your financial life to help make sure things go well in the future.
Getting out of debt is a great step in the right direction.