Pros and Cons of Debt Management Plans

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You are not the only one who is overwhelmed by debt. An average American has more than $90,000 of debt. This includes credit cards, student loans, and personal loans. You can work with a non-profit credit counseling agency to help you pay your debts.

This approach will allow you to pay off your debts in five or fewer years and provide other financial management assistance. Debt management plans may not be right for everyone. There are also some disadvantages to consider. Here are the facts.

Important points to keep in mind

  • You can pay off your debts in as little as five years with debt management plans.
  • You will need to partner with a non-profit credit counseling agency to start a plan for debt management.
  • To participate in a debt management program, there may be an enrollment or maintenance fee.
  • Only unsecured debts, such as credit cards, can be addressed by debt management plans.

 

What is a Debt Management Plan (DMP)?

You are signing up for a debt management program with a non-profit credit counseling agency. Your advisor will reach out to your creditors to obtain their participation.

They may be able to reduce your interest rates or lower your monthly payments. Advisors can help you manage your money, budget and reduce expenses.

You will make one monthly payment to your credit counseling agency as part of a debt management program. This is in addition to paying your creditors directly.

Based on an agreement between the two of you, the counseling agency will pay your creditors.

Debt management plans require constant monthly payments. These usually take between three and five years.

During that time, you must agree not to accept or use any additional credit. Your debt management plan will end, and your accounts will be completely paid off.

 

Debt management plans: The pros and cons

Benefits

  • Get rid of all your debts in five years. As part of a debt management program, you usually pay off all your accounts within five years.
  • Make your payments easier: Instead of making multiple payments with due dates and payments, you will only have to make one payment to the credit counseling agency. It can be easier to manage your money if you only make one payment.
  • Increase Credit Score: As you make your first payment under the debt management plan, you will gradually increase your credit score.

The inconvenience

  • Losing credit card access: Credit counseling agencies will ask you to stop using your credit cards or close them. This is to avoid further debt accumulation. You will only need cash and debit cards in the future until you have paid off your debt.
  • You cannot open any new credit lines: As long you are in a debt management program, you can’t open new credit lines. This means that you cannot get an auto loan to purchase a car or a personal loan to renovate your house.
  • Creditors are not allowed to participate. Not all creditors will be willing to take part in a debt management program. The plan will not be effective if creditors refuse to participate.

 

There are three credit counseling agencies you should consider

There are many credit counseling agencies. There are usually registration and maintenance fees. However, some agencies waive these fees for specific situations.

Here are three non-profit credit counseling agencies that offer solutions for debt management in all 50 US states.

Be aware that scammers can pose as credit counselors. Make sure that potential agencies are not-for-profit when you’re evaluating them. It is a good idea also to verify each one with your state attorney general or your local consumer protection agency. You can also find a list of agencies on the United States Trustee Program.

Alternatives to Debt Management Plans

Although debt management plans are effective in paying off debt, they may not be the best option. Student loans and secured debt are not eligible for debt management plans.

Credit counseling agencies may also limit the amount of debt that you can participate in.

These alternative strategies may be a better option if a plan for debt management is not suitable for you.

  1. Debt consolidation: To consolidate your debts, you borrow a personal loan to pay off existing accounts. A debt consolidation loan is a great way to save money and accelerate your repayments.
  2. Debt Resolution: Debt Settlement is a risky strategy where you stop making payments and hope your creditors will settle for less.
  3. Bankruptcy If your debt exceeds what you can afford to repay, filing bankruptcy could allow you to discharge your obligation. Depending on the type, bankruptcy will remain on your credit report for 7-10 years. It will make it difficult to borrow the future.

You can speak to an advisor at a non-profit credit counseling agency if you aren’t sure which approach will work best for you.

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