At a Glance
Debt management programs can help you pay off debt while also lowering your interest rates and monthly payments. However, it’s important to be aware of the downsides to signing up for a plan.
This article will cover:
What is a debt management plan?
With a debt management plan, you’ll team up with a nonprofit credit counseling agency who will work with your creditors to try and lower your interest rates and monthly payment. They’ll help create a 3-5 year payment schedule that will repay your debt entirely. You’ll make monthly deposits to the agency, who will then pay the creditors.
Debt management plan pros
Advantages of debt management plans include:
You could pay lower interest rates
Most credit counselors work with creditors to secure lower interest rates for your payments.
Your credit score may get a bump
While debt management plans won’t directly affect your credit score, certain factors, such as the fact that you’ll be making consistent payments on time, will most likely increase your score.
You’ll only need to make one payment per month
You’ll be able to focus on just one payment per month, instead of having to think about several monthly bills.
You might pay your debt off quicker
With lower interest rates and better terms, you might be able to pay off your debt faster than if you tried to pay it off yourself.
Creditors/collectors will stop contacting you
Any collection activity should stop once you start your plan.
Will help you stay organized
Your counselor will put you on a plan with defined payment dates and an end date of when your debt will be paid. You’ll have a plan of action to attack your debt.
Debt management plan cons
Disadvantages of debt management plans include:
Leaving the plan will mean losing benefits
If you decide to quit the plan, you’ll lose all benefits, such as reduced interest rates.
You can’t take out new credit
While enrolled in a plan, you won’t be able to apply for or use additional credit.
You’ll have to close your credit accounts
You won’t have access to credit cards for the duration of the program, though some agencies may allow you to keep one credit card open in case of emergencies.
Not every creditor accepts debt management plans
Debt management plans are not universally accepted. Make sure to check with your counselor on whether your creditors accept them.
You need to be patient
Debt management doesn’t happen overnight. You need to be prepared to stick with a plan for anywhere from 3 to 5 years.
5 steps to sign up for a debt management plan
Here are the 5 steps of signing up for a debt management plan:
Once you select a plan, you’ll meet with a credit counselor who will review your finances, create a budget, and determine your payment schedule. During the session, your credit report will undergo a soft pull, which won’t hurt your credit score.
Your counselor will ideally also spend time educating you on how to improve your money management skills.
After the meeting, the counselor will submit your budget proposal to your creditors who will either approve it or request changes. The final terms must be agreed on by both you and the creditors.
You’ll receive a copy of the final term agreement to sign and return.
Once the program begins, you’ll make monthly payments to the agency, who will then pay back your creditors according to a predetermined payment schedule. If debt to one creditor is paid off before the others, the extra funds will be divided among the other creditors in order to pay down those debts quicker. Your monthly payments won’t change.
How to protect yourself from scams
To avoid being scammed by an unreliable organization, make sure to:
- Avoid agencies that request fees other than for initial set-up and monthly maintenance. If they ask for fees for membership, application, or per-creditor, look elsewhere.
- Check that they’re accredited, typically by the International Organization for Standardization (ISO) or the Council on Accreditation (COA).
- Check that they’re a member of the National Foundation for Credit Counseling (NFCC).
- See if they’ve had any complaints filed against them by the Better Business Bureau.
- If you sign up for a plan, don’t forget to check in with your creditors periodically to make sure that they’re getting paid.