Are you overwhelmed with debt? If so, a debt management plan might be a good option.
Debt management can help you get your finances under control so you can reduce stress and eventually achieve a financially secure future.
With a solid debt management plan in place, you’ll find it easier to repay your debts and avoid the consequences that come with going into default mode or bankruptcy.
Before you move forward with a debt management plan, however, it’s important to understand how it works as well as its pros and cons.
Debt Solutions for All Situations
Who Is Debt Management For?
Debt management could be for you if any of the following situations apply to you.
You’re Overwhelmed with Unsecured Debt
If you have a lot of unsecured debt like credit card debt or personal loan debt, debt management can help you get out of it. It can provide a clear path to a better financial situation.
You Have a Steady Income
Since debt management involves repaying your debt, it’s important that you have a steady income. This may come from your job, retirement savings, or any other source.
You’d Like to Avoid Debt Collectors
With debt management, you can say goodbye to annoying phone calls from creditors and debt collectors. It may give you some much needed peace of mind.
You Can Stick to a Plan
Debt management isn’t a magical solution that will allow you to get rid of your debt overnight. You must be patient and commit to months or years of payments.
How Debt Management Plan Works
Typically, debt management plans are offered by credit counseling agencies, which are nonprofit organizations that are accredited by the National Foundation for Credit Counseling.
Meet with a Credit Counselor
Once you begin a debt management plan, you’ll meet with a credit counselor who will take a close look at your current financial situation. From there, they’ll discuss several solutions for your debt.
Discuss Your Debt and Payment Plans
If you have a hefty amount of unsecured debts, like credit cards and personal loans, the credit counselor may recommend a debt management plan.
Note that a debt management plan won’t work for secured debts like mortgages, car loans, and student loans.
Keep in mind that most credit counseling agencies will charge you an enrollment fee plus a monthly fee for each account.
Contact and Negotiate with Your Creditors
If a debt management plan is a viable solution and you choose to pursue it, the credit counselor will reach out to each of your creditors and ask to be the payer on your accounts.
Depending on your situation, they may even negotiate lower better rates, lower monthly payments, or no late fees.
Make Payments
Every month, you’ll make an electronic payment directly to the counseling agency.
The agency will then pay your creditors on your behalf, and you’ll receive regular progress reports, so you always know where you stand.
As you go through the program, do your best to make your payments on time and don’t apply for new credit. If you stick to it, you will eventually become debt free, typically within three to five years.
Why Debt Management?
There are several reasons you may want to consider debt management.
Low-Cost Solution
Compared to other debt relief programs, a debt management plan is affordable for most consumers.
It may only cost a small fee or even nothing because it involves a nonprofit credit counselor.
You may find some debt relief options that are expensive, but you should use a nonprofit option to keep costs low.
Keeps Credit in Check
With a debt management plan, you can protect and even boost your credit score.
All you need to do is make timely payments. This is a huge plus as other debt management solutions can take a serious toll on your credit.
May Reduce Your Rates
A debt management plan can give a credit counselor the opportunity to negotiate interest rates and fees with your creditors.
Lower rates and fees may result in hundreds or even thousands of dollars in savings.
Single Monthly Payment
It can be a challenge to keep track of multiple debts with varying due dates.
Since you’ll make one payment to the credit counseling agency every month, you won’t have to worry about this issue anymore.
New Financial Skills
Paying off your debt is only one piece of the puzzle.
A debt management plan can also teach you how to improve your finances and make smart money related decisions down the road.
What to Expect on a Debt Management Plan
Here’s how a typical debt management plan may unfold.
- If you move forward with a debt management plan, you’ll first reach out to a credit counseling agency.
- The agency will then match you to a credit counselor who will get the process started.
- During your initial session, the counselor will dive deep into your finances and may offer free budgeting advice, review your credit report, and provide you with useful tools and resources.
- The counselor will also determine whether you’re a good candidate for debt management.
- If you decide to move ahead with the program, your counselor will negotiate with your creditors and try to secure lower rates and payments. They might even convince your creditors to waive some fees.
- You’ll make a single payment to the credit counseling agency every month so the counselor will distribute your payments to your creditors.
- You won’t have to worry about any calls or messages from your creditors at this time. The goal is that you’ll get rid of your unsecured debt in three to five years or even sooner.
Can You Do Your Own Debt Management Plan?
It is possible to create your own debt management plan.
You may want to go this route if you struggle with debt but consider yourself disciplined and feel confident you can make your monthly payments without any support.
Just keep in mind that you won’t have access to a professional that may be able to negotiate with your creditors and help you get out of debt faster.
If you want to lower your rates and fees, it will be your responsibility to contact your creditors. This may be time consuming and a bit daunting, especially if you’ve never done it before but if you give it your all, you may succeed.
Once you make your negotiations, you’ll need to create a budget and manage your own payments. You will need to stay on top of your finances so you don’t miss any payments and get off track.
Pros and Cons of Debt Management
Just like any debt relief strategy, debt management comes with benefits and drawbacks.
Debt Management Pros
Professional advice
Let’s be honest. It’s easier said than done to get out of debt.
If you inquire about debt management, however, you can work with a credit counselor that will take a close look at your finances and help you determine how to proceed.
Even if you decide a debt management plan isn’t for you, the initial session can be very insightful.
Money savings
During a debt management plan, a credit counselor may negotiate with your creditors to help you lock in lower rates and fees.
Not only will this expedite the debt payoff process, but it can also provide you with some extra wiggle room in your budget.
You can use the additional funds to build your emergency fund or meet other financial goals.
Manageable solution
Without a debt management plan, you may have to remember to make multiple payments to several creditors.
A debt management plan can lead to a single monthly payment to a credit counseling agency and completely simplify your debt payoff efforts.
Accountability
Yes, you can continue to make minimum payments on your unsecured debts. But a debt management plan involves a credit counselor that will hold you accountable and potentially help you become debt free sooner than you ever thought possible.
Improved credit score
If you don’t have the best credit, a debt management plan should be on your radar. As you start to make your payments, you can slowly but surely improve your score. Stronger credit can open the doors to more and better financing opportunities in the future.
Debt Management Cons
Only for unsecured debts
Unfortunately, debt management plans are not intended for all types of debts. While this strategy may be worthwhile if you have unsecured debts, like credit cards and personal loans, it won’t help you with secured debts, such as your mortgage, car loans, and student loans.
Potential fees
If you’re lucky, you might be able to participate in a debt management plan for free. But most credit counseling agencies charge small fees for their services. The amount you pay will depend on where you live and the agency you choose. If you can’t afford the fees, you can always ask about waivers or discounts.
Less credit access
Once you begin a debt management plan, you’ll have to close your credit cards. If you find yourself in a situation where you need fast cash, this might be a problem as you won’t be able to swipe your card.
Can’t open new credit
If you commit to a debt management plan, you won’t be able to open new credit lines. You’ll need to depend on cash and debit cards until you complete the program.
No guarantees
Just because a credit counselor negotiates with your creditors, doesn’t mean they’ll be successful. Some creditors will flat out deny their requests for lower rates and fees.
Not all creditors will participate
While many creditors will approve your debt management plan, some will refuse to participate. If this happens, the plan won’t be as effective.
Doesn’t stop a spending issue
The goal of a debt management plan is to help you get out of debt. If you tend to overspend and live above your means, it may not be the right solution. You might be better off focusing on budgeting first.
Takes time
A debt management plan usually involves years of monthly payments. It’s not a shortcut or lightning-fast way to get out of debt.
