Understanding Debt Management Plans: Pros, Cons, and Limitations
A debt management plan (also called a debt management program or DMP) offers a structured path to debt relief, particularly beneficial for individuals with struggling credit. Overseen by a non-profit credit counseling agency, a DMP consolidates your credit card debt into a single, manageable monthly payment while negotiating with creditors to lower or eliminate interest, penalties, and fees.
While DMPs offer many advantages, there are some drawbacks and limitations that come with it. We’ll explore the pros and cons, helping you make an informed decision about whether a DMP is a good idea for you.
Debt management plan pros
Debt management plans offer many positives. They are a great choice for those with a high amount of unsecured debt (like credit card debt), those with poor credit, and those who are motivated to make significant progress towards becoming debt-free. Here are a few of the main pros of a DMP:
One monthly payment
Instead of juggling multiple payments to different creditors, you make a single, manageable monthly payment to the credit counseling agency, which simplifies your finances. It really takes the stress out of your debt for many people.
Reduced interest rates
Creditors may significantly lower, or even eliminate, interest rates on your credit cards, saving you substantial money over time. Most consumers struggling with credit card debt get stuck making minimum payments that make no difference in the principal amount they owe. It can take half a decade to repay a $1,000 credit card balance while making only minimum payments. Imagine how long that would take if it were $10,000 to $20,000.
Elimination of fees
Late fees, over-limit fees, and other penalties are often waived or eliminated. Fees add up quickly and they have little to do with the original principal of the debt you charged. It’s much easier to focus on paying down your debt when you’re not being penalized.
Improved credit history
Consistent on-time payments can help build positive credit history, improving your credit score. Many potential DMP enrollees get nervous about their credit taking a brief hit for enrolling a Debt Management Program. But it will improve with consistent on time payments. A DMP can have a positive impact on your credit as opposed to bankruptcy, which will cause your credit to suffer for seven to 10 years – or a debt settlement program, which will negatively impact your credit for seven years.
Clear timeline
You get an exact timetable of when you’ll be debt-free. A certified credit counselor will work with you to create a budget and determine a monthly payment that works for you and your financial situation. You will know upfront how long it’ll take to get out of debt if you commit to the program. Many people like knowing there’s a goal and a date they will meet that goal.
Budgeting assistance
You’ll receive budgeting guidance and support, so you can balance your finances and start saving again. Having a budget is the starting point of every financial goal. You’ll need a budget to get out of debt. It’s essentially your map or blueprint to keep your finances in order. Even after you graduate from a debt management program, you can take that budgeting knowledge with you to apply to future financial goals.
Reduced collection calls
The credit counseling agency handles all communication with creditors, eliminating the stress of constant collection calls. Creditors can put unnecessary stress on consumers. Knowing that a credit counseling agency has your back and will end the collection calls is often a sigh of relief for many consumers. There are laws in place like the Fair Debt Collection Practices Act to prevent collector harassment. It does still happen, though. Visit this page if you’re experiencing harassment from a debt collector.
Improve standing
Most creditors will bring past-due accounts current after three program payments, regardless of how far behind you are. This will help you avoid late fees and penalties from the credit card companies. Visit this page where Consolidated Credit answers the question “What’s the fastest way to bring past due accounts current?”
Debt management program cons
There are a few limitations and downsides that come with a DMP. However, most people find these to be manageable. Still, it’s important to understand them before enrolling. The main cons include:
Frozen credit cards
Any credit cards enrolled in the program will be frozen when your program starts, and the accounts will be closed as they get paid off. Creditors want to ensure the lower interest rates they approve are used to pay down debt and not used to make new purchases. It’s important to note, you can keep credit cards while in a DMP, but it isn’t recommended.
Initial credit score impact
Closed credit card accounts can decrease your credit age, which may cause a drop in your credit score if your score was high when you enrolled in the program. However, it’s important for consumers to know as you make payments in the DMP your credit will experience positive impact. Credit utilization is 30% of your credit score, which is the second largest factor. If your credit utilization is already high, then your score is likely suffering before enrolling in a DMP anyway.
Limited credit access
You can’t apply for new credit cards while you’re enrolled in a DMP. This may concern some potential DMP enrollees but it’s the wrong outlook. The main objective of Debt Management Program is to get out of debt. Plain and simple. If you stick to the program, stick to your budget, and make timely payments you will get out of debt. It’s also only an issue with unsecured lines of credit. It’s important to know you can still apply for secured credit, like a mortgage or auto loan.
Not all debts can be included
Secured debts (mortgages/car loans), student loans, or back taxes cannot be included in a DMP. Debt Management Programs are really designed for credit card debt. A credit counseling agency works with creditors to lower the interest rates on your credit cards. Those creditors must actually work with the nonprofit credit counseling agency. Here’s a list of the creditors that Consolidated Credit works with.
Fees
DMPs are usually not free programs and do come with some fees . However, these are usually minimal (the average is around $40 per month and is capped at $79 nationally) and are rolling into your monthly payment. The initial credit counseling session is – and always will be –100% free. Your credit counselor will ensure these costs are affordable within your budget. You’ll know upfront what your payments are before enrollment.
Requires commitment
You must make monthly payments. If you miss payments, you may get dropped from the program. In this case, the creditor has the right to reset those high interest rates and apply new fees to your account if you struggle to keep up with your payments. Any payments made to that point through the DMP will still be credited to your accounts. You will be debt-free if you stick to the program. Find out success stories from Consolidated Credit clients who’ve graduated and are now living debt-free here.
Budget restrictions
You may need to make significant adjustments to your budget to accommodate the DMP payments, which can be challenging for some individuals. Trouble sticking to a budget is a major lifestyle factor in folks who end up needing help from a Debt Management Program. The goal of a DMP isn’t to just get you out of debt and move on. It’s to ensure you don’t end up in credit card debt again. As a nonprofit organization, Consolidated Credit offers free educational resources and workshops to help our clients stay debt-free.
It takes time
A DMP is not a quick fix for your debt. It usually takes between 3-5 years to complete the program. That may sound like a longtime to some potential enrollees. Consider this: Most debt relief solutions take years to complete. Even bankruptcy will impact your credit for seven to 10 years. Getting out of debt takes time and commitment. Over the past three decades, Consolidated Credit has helped more than 10 million and consolidated over $9 billion in debt. Trust the process and you will get the help you need.
While there may be some drawbacks, a debt management plan can be a life saver for many people. It helps get you out of credit card debt and doesn’t hurt your credit score in the long run, in fact it usually has a positive or neutral effect. If you’re seeking debt relief, call Consolidated Credit at (844) 276-1544 . One of our certified credit counselors will help you determine if a DMP is right for you or can help you find a solution that works for your unique financial situation.
Debt Management Plans – What’s Holding You Back?
We’ve all heard motivational stories of people who have been in financial trouble, then pulled themselves up and are now wildly successful. While these stories are inspiring, not everyone has the means or the support to do the same.
When people get in financial trouble, they often contact the Financial Counseling Association of America (FCAA) for help. One of our member agencies can review their unique situations and make recommendations, giving them pathways out of the financial holes.
One of the tools our credit counseling agencies commonly use to help people in debt is a debt management plan . Debt management plans or DMPs may combine multiple debts – like credit cards or personal loans – into a structured repayment program with a lower, single monthly payment. DMPs are generally set up and managed by a credit counseling agency (CCA), like FCAA’s members.
Many people make their way to financial freedom through a DMP each day. Others choose riskier, more difficult routes like debt settlement or borrowing money and stressing family relationships.
Why do some choose a more difficult path? This article explores four reasons people say no to a debt management plan and why those reasons often leave them in financial trouble.
1. “I cannot afford the reduced payments a debt management plan requires.”
We live in an economically challenging time where many people are wrestling with debt.
“[Our] clients are still experiencing a post-COVID financial hangover. The assistance (student loans, rental, stimulus, etc.) has dried up, but many clients have struggled to rebuild their income to pre-pandemic levels,” said Lara Ceccarelli, Credit Counselor at American Financial Solutions. “They’re carrying debt accumulated during periods of reduced income or unemployment.”
Fortunately, there are options when people need help with debt. Lisa Ohnemus, Director at Consumer Credit of Des Moines explained that when someone believes they cannot afford a debt management plan, credit counselors are trained to find ways to help.
“We will first reevaluate the budget, looking for areas where the client can cut expenses or increase income to make the payments more manageable,” Ohnemus said.
Anissa Schultz, Director of Enrollment and Client Care at Credit Advisors, agreed.
“If we can suggest spending habit changes that create room in the budget, this is the place to start,” said Schultz. “If the budget is already tight, temporary increases to income, such as a second job, may bring some relief until the debt is paid down.”
CCAs work with consumers’ creditors to find ways to make their clients’ payments affordable for them.
“Some creditors offer hardship programs for clients with negative budgets,” shared Ohnemus.
2. “I do not want to close all of my credit cards.”
Many people in financial trouble are hesitant to close all their credit cards to enroll in a debt management plan, even though they are indebted to the card company.
“They fear giving up the security of having the card(s), even though they are paying huge interest rates,” said Ohnemus.
When you enroll in a debt management plan, every card included in the plan must be closed . But why?
To create a debt management plan, your CCA works with your credit card companies to negotiate lower interest rates. These lower rates save you money on interest and ensure the creditor is repaid. However, in return for lowering the interest rate, creditors require you to close your cards. This ensures you use the lower rate to get out of debt, not go on a shopping spree.
Some CCAs recommend keeping a credit card with no or low balance in case of emergencies. You will be strongly advised not to use the card, though. Creditors involved in the DMP will be actively monitoring your spending. If you accrue more unsecured debt on that card, they may ask for it to be closed.
“We usually recommend that consumers not enroll the card that has the most available remaining credit, depending on the creditors involved,” said Martin Lynch, President of the Financial Counseling Association of America and Director of Education for Cambridge Credit Counseling.
But, many people in financial trouble do not need to keep a credit card open if they follow their credit counselor’s advice.
“Most bank accounts come with a debit option, so a credit card is not necessary,” said Schultz. “At the end of the day, debt is debt and we want to tackle it all!”
“Closing your credit cards can be scary and feel risky, but the overall benefits of the DMP and achieving financial stability outweigh the loss of credit access,” said Ohnemus. “We discuss building an emergency fund to provide a safety net in case of emergencies.”
3. “I need to have a credit card in case of an emergency.”
Emergency situations do happen. Some emergencies are short-term issues, like getting a flat tire. Others can be a long-term problem, like loss of income.
“This is why emergency savings funds are so important and why we urge consumers to create them,” said Lynch.
Not everyone has an emergency fund when they enroll in a debt management plan, but building one over time is wise. Emergency savings allow people to tap into money they already have set aside rather than borrow funds from a high-interest creditor.
If you choose to leave a credit card off of the DMP for emergencies, paying off the card as soon as possible is a high priority.
“If it’s a more serious, long-lasting emergency, like a loss of income, you should contact your counselor,” advised Lynch. “Individual accounts can be removed from the DMP, but that will worsen the situation, not improve it, because the creditor could restore the rates and fees being assessed prior to the creation of the plan.”
The CCA will also advocate with creditors on your behalf.
“The client’s creditors will be evaluated to see if the client can miss a payment,” said Ohnemus. ”If the problem lasts over a month, some creditors offer a program called EMS. With EMS, we can send lowered payments to the creditor during their hardship while still keeping them on a DMP. Credit counselors can also review the client’s budget to help them build emergency savings into it.”
4. “Debt management plan payments seem too high compared to a debt settlement plan.”
This is one reason people in financial trouble may take the hard road and choose debt settlement. It may be appealing on the surface, but debt settlement often brings collection calls, late fees, potential litigation and even tax liability.
While debt management plans and debt settlement both depend on the amount of debt the person has, the costs and outcomes can differ significantly.
“The biggest difference is that credit counseling agencies work with the consumer’s creditors and secure approvals for the accounts that are enrolled,” said Lynch.
Your monthly payment on a debt management plan will vary based on your debt, but your credit counseling agency fee is normally minimal – generally $30 or less. At the end of your plan, you will have paid your debts in full and can walk proudly into financial freedom with new, healthy financial habits.
“Debt settlement companies require you to sever ties with your creditor and miss payments since creditors won’t settle a current account. While you’re missing payments and setting aside money to propose a settlement, your credit is damaged, and you can be sued at any time for the full balance owed,” said Lynch.
Debt settlement companies are prohibited from charging customers until an account is settled. However, you will pay the bank a convenience fee to set up the trust account where you will deposit funds toward the potential settlement.
“If an account is actually settled, you’ll pay a hefty amount to the settlement company, typically either 15% to 20% of the debt at enrollment or between 25% and 40% of the amount you supposedly ‘saved’ by settling. There is often very little saved through for-profit settlements unless the consumer has lots of money available when they initially call the settlement company,” warned Lynch.
Debt management plans are a good way to get out of financial trouble
Living in debt and falling behind on payments is a miserable, stressful way to live. There are many ways to get out of debt, but it is important to choose wisely for the best outcome for you and your family.
Don’t let any of these reasons hold you back from financial freedom. Take the first step by trying FCAA’s Debt Freedom Tool to create a budget or by contacting an FCAA credit counseling agency today.
https://www.consolidatedcredit.org/debt-management-program/debt-management-program-pros-cons/https://fcaa.org/2024/09/05/debt-management-plans-get-out-of-financial-trouble/
