How a Debt Management Plan Could Help You Get Back on Track

How much would your life improve if your bills were on track? Having less financial stress can benefit you both practically and psychologically. A debt management plan (DMP) could help you pay off your unsecured debt under the guidance of a trained credit counselor. When you complete your DMP, relief is a wonderful feeling.

Learn more from our experts about DMPs and whether this is the right debt relief option for you.

What Is Debt Management?

Debt management is a type of repayment plan set up by a credit counseling agency and the creditors to which you owe money. Credit counseling agencies are nonprofit organizations typically funded by credit card issuers. You and your creditors agree to the plan on how the money is paid out. Each month, you deposit money into an account with the credit counselor, and this money goes toward paying your credit card or other unsecured debt, such as medical bills. The DMP continues until your debt is repaid, usually three to five years.

If managing your credit card debt is challenging, you are not alone. Millions of people have credit card debt, and once you have balances, they can be really hard to rein back in. 

Signs That You May Need Debt Management Help

Feeling overwhelmed about your debts is one sign that you could use a DMP. Does it seem that your balance never decreases, even though you make payments each month? While this is cause for concern, any of the following are red flags:

• Making only minimum credit card payments

• Missing credit card payments or frequently making late payments

• Maxing out your credit cards or getting close to the limit

• Using credit cards to pay for daily living expenses

• Charging more on credit cards than you are paying off each month

• Juggling balances and due dates on several credit cards

• Getting calls from creditors

• Not sure how much total debt you owe

What Is Not Included in a Debt Management Plan?

Debt management plans generally deal with unsecured loans, such as personal loans or credit cards. Secured loans, such as mortgages and auto loans, do not qualify. Many debt management plans will not deal with student loans, which are unsecured. Unsecured business loans like small business credit cards usually aren’t included either.

Choosing a Debt Management Company

Think hard about choosing a debt management company. Some debt management companies or credit counseling agencies aren’t legitimate and prey on worried people. Your state’s attorney general, the Better Business Bureau, or your local consumer protection agency can inform you if the debt management companies you are considering have any complaints against them.

Ask about fees. Credit counseling agencies typically charge $25 to $50 per month to administer your debt management plan. They might also charge an enrollment fee, or fees for educational services. 

The debt management company should always send you free information about its services and programs. If the company will not do that without requiring extensive information about your finances, look elsewhere.

Find a debt management company whose credit counselors are certified or accredited by an outside organization, such as the National Foundation for Credit Counseling.

Questions to Ask a Debt Management Company

When choosing a debt management company, you need to ask the right questions before signing up. Here are some important questions to ask.

What services do you offer?

Because everyone’s circumstances are different, you want a debt management company offering at least these services:

• Budget counseling to help you stay on track.

• Debt management to negotiate with your lenders for lower your interest rates or waive fees.

• Money management help to make sure you’re able to make your payments.

• Consumer credit education to help you understand how to build up your credit score.

If a company wants you to sign up for a DMP without truly analyzing your financial situation, that’s another red flag.

Are you licensed to offer services in my state?

Many states require credit counseling agencies to register or obtain licenses before offering services. Do not consider any organization that is not licensed to do business in your state. Being told a license is pending is not good enough.

Find out if the organization is licensed by checking out the U.S. Trustee Program’s list of approved credit counseling agencies.

Will I have a formal contract with you?

This is a must. Lawyers like to joke that a verbal agreement is not worth the paper it's written on. Get everything you’re told in writing, and read the document carefully before signing anything. If you have any questions about the agreement, make sure you’re comfortable with the answers before signing any contract.

What are your counselors’ qualifications?

You want counselors certified or accredited by outside organizations. If someone says that counselors are certified, ask which organizations accredited or certified them.

What are the fees?

When it comes to fees, find out exactly how they work and what is covered and why. Transparent fees make sure you are not surprised by any hidden charges.

How long have you been in business?

The longer a company has been in business, the more likely it is to be providing valuable service. Those companies have a track record you can verify. You don’t want to get involved with a fly-by-night operation.

Is Debt Management Right for You?

A DMP isn't for everyone. If you have secured debt or student loans, a DMP may not offer much help. However, if you have unsecured debt, you can afford a payment, and you’re willing to commit to the DMP, it can be a good option.

Consider your income and how much you have left over every month after you pay your bills to help you decide if a DMP is the right choice. The payments required by a DMP are significant, because they are designed to clear your debt in three to five years. As a result, some people end up leaving their program early because they cannot afford to make the monthly payment. If your creditor has lowered your interest rate or offered other assistance, that help will go away if you leave the plan before it’s complete.

Along with debt management, you should receive some financial lessons from the agency. Many borrowers haven’t learned about money management yet, and that’s one reason you might have fallen into debt in the first place. Better budgeting and financial management skills can have a big impact on your life going forward.

A DMP can’t stop collection efforts or lawsuits. Your creditors don’t have to agree to participate. If they do, however, and you stick with your plan, you could prevent bankruptcy or defaulting on your debts and the resulting negative impact.

How Debt Management Works

Get started with a financial counseling session in which the counselor goes over your finances with a fine-toothed comb. The counselor reviews your budget, debts, and financial goals. 

Creditors may agree to waive certain fees when you enroll in a DMP. Your counselor may work with your creditors to lower the interest rate on your debts. This enables more of your payment to go toward getting you debt-free.

Once enrolled in a DMP, you deposit a set payment each month with the credit counseling agency, which sends the funds to your creditors. DMPs typically last three to five years.

Finding the Right Debt Relief Option for You

Whether you choose debt management, debt settlement, or some other type of solution, the sooner you get started the sooner you’ll be out of debt. Freedom Debt Relief will help you fully understand your options for dealing with your debt, including our debt relief program. Our Certified Debt Consultants can help put you on the path to a better financial future by helping you choose the best option. Find out if you qualify right now.