What You Need to Know About Debt Management Plans

By: Finance Guider Team

What You Need to Know About Debt Management Plans

A Debt Management Plan (DMP) pertains to a method of debt relief that involves creating a plan with your creditors to pay off your debt. You make regular, timely deposits each month with your credit counselor, and the credit counseling organization will use your deposits to pay downy your debts.

While DMPs are often recommended by credit counseling organizations, the Federal Trade Commission (FTC) states that DMPs are not for everyone. Before you agree to a Debt Management Plan, be sure to examine the terms and conditions and get the facts straight. In order to help educate consumers, the FTC published a list of questions that consumers should ask before getting into a DMP.

How does Debt Management Plan work?

If you choose to enroll in a Debt Management Plan, the credit counseling organization will contact your creditors and create a new payment schedule for your debts. The new schedule includes lower monthly payments which the credit counseling organization pays with the money you send them each month.

What are the benefits of Debt Management Plans?

One benefit to a debt management plan is that one, consolidated monthly payment made to your credit counselor will be paid electronically to all your creditors. Because this payment is for less than you currently owe each creditor, you may see an immediate reduction in the amount of interest you pay each month.

When will my Debt Management Plan start?

Your DMP will typically begin once your counselor collects all of the information he or she needs from you. In order to complete a plan, they’ll need information about your income and expenses as well as contact information for your creditors. You can expect it to take several weeks between when you first enter into a debt management plan and when you begin making payments.

Can I get a Debt Management Plan even if I don’t have a job?

Some credit counselors will work with people who are unemployed or receiving unemployment benefits, but this may not be the case for all debt counseling companies. Before signing up for a DMP, double-check to ensure that the credit counseling organization will work with you if you don’t have steady income.

Can I negotiate the terms of my Debt Management Plan?

Typically, creditors are not willing to change your interest rates or waive fees when you enter into a DMP. However, some counselors may be able to negotiate for additional concessions from your creditors. For example, if you have a credit card that is about to expire, your counselor might be able to negotiate a lower interest rate on the remaining balance.

How much does it cost?

One of the benefits of a Debt Management Plan is that credit counseling organizations typically charge a one-time fee instead of monthly payments. Some fees may include an initial enrollment or setup fee, a monthly maintenance fee or per-payment fee.

If I default on my Debt Management Plan, how much will it damage my credit?

If you fail to make payments on your debt management plan, the delinquency may appear on your credit report. A 30-day delinquency can lower your credit score by as much as 100 points.

How can I get out of a Debt Management Plan?

You can leave your DMP at any time as long as you are current on the payments you have been making to your credit counseling organization. You should also check with all of your creditors before leaving a plan because some companies may require that you pay off the entire outstanding balance during the term of the DMP agreement.

How often will you review my account and how much notice will I receive?

The FTC recommends that, if possible, consumers do their own research on a credit counseling organization before signing up for a Debt Management Plan.

How often can I get status reports on my accounts?

Status reports allow you to see how you’re doing with your debt. Ensure that your credit counselor will be able to provide you status reports on your accounts. See if you can acquire the information online or over the phone.

Can you get my creditors to lower or eliminate interest and finance charges, or waive fees?

A lot of credit counseling organizations claim that they can get your creditors to agree to lower payments and slash interests. In order to be sure, contact your creditors as well.

What debts are not included in the DMP?

Some creditors will not accept a lump sum payment, such as those for utility bills or insurance. Ensure that your counselor can work with these types of accounts.

What happens if my plan doesn’t work?

Ensure that you can get out of the plan and back to your current payment schedule if it doesn’t work. A lot of credit counseling organizations have terms and conditions which allow them to terminate your plan if you’re unable to keep up with payments.

Remember, you have bills to pay as well. Know exactly what your DMP covers to make sure that you don’t get behind in the bills that are not included in the DMP.

For the full list of questions, please visit the official website of the Federal Trade Commission.

Referecnces:

https://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre34.shtm

https://www.nerdwallet.com/article/finance/how-does-debt-management-work

Related post