Debt Management Programs: What are They & How to Get Help

Debt Management Plans

A debt management plan helps eliminate credit card debt without taking out a loan. Debt management plans consolidate debt, may reduce interest rates and provide affordable monthly payments based on your budget.

About Debt Management Programs

What Is a Debt Management Plan?

A debt management plan is a carefully constructed payment schedule that consolidates credit card debt payments into one affordable monthly payment. There is no loan involved, and credit scores are not a factor.

Consumers in a debt management program generally pay reduced interest rates on their credit card debt. After enrolling in a debt management program, creditors require you to close your cards, so as not to incur additional debt.

Features of a Debt Management Plan

  • Consumers make one consolidated monthly payment to a nonprofit credit counseling agency, which then pays off all creditors, in an agreed upon amount.
  • Creditor offer reduced interest rates on credit card debt to as low as 8% (sometimes your interest rate could be as low as zero).
  • Monthly payments are calculated at an affordable rate based on consumer’s budget and are agreed upon by the creditor.

Credit Card Debt Management: How to Enroll

A debt management program requires a credit counseling session to determine that this is the best solution for your debt problems.

The process begins with a phone call to InCharge Debt Solutions or you can start with an online credit counseling session. The counseling session should take 25-40 minutes.

What to expect in a credit counseling session:

  1. Our certified credit counselors help you identify the root cause of your debt.
  2. Our counselors examine income and expenses to help you create an affordable monthly household budget.
  3. We’ll pull a snapshot of your credit report to make sure your balances and monthly payment requirements are accurately recorded.
  4. We’ll provide you with a debt-relief recommendation, based on your income and debt.
  5. If a debt management program is the best option for you, you can sign up immediately.
  6. Creditors require you to close credit card accounts, but some will agree to allow you to keep one card off the program, for use in emergencies.

Video: How Does a Debt Management Program Work?

This video explains how a nonprofit debt management program works by consolidating your credit card debt payments into one payment and saving you by reducing your interest rates and fees.

Pros & Cons of Debt Management

Debt management programs are one of the most effective debt-relief options on the market. They work because monthly payments are tied to a custom-designed budget tailored around your income and spending habits.

However, as is the case with all debt-relief solutions, consumers should do research to make sure they understand the ups and downs associated with a debt management program.

Pros of a Debt Management Program:

  • Affordable payments: Credit counselors at InCharge review income and expenses to determine how much of your money is available to apply to credit card debt. Card companies reduce the interest on your credit card debt to a level that you can afford. In many cases, interest rates drop from the mid-to-high 20s down to single digits of around 8%.
  • Simple payment: A single payment goes from your bank account to InCharge, which then distributes it to all creditors in an agreed upon amount. No need to try and keep up with payment dates and no more late fees tacked on to your balance.
  • Fixed timetable for eliminating debt: Debt management programs are set up to eliminate credit card debt in 3-5 years, or less.
  • Account management software: You can use this 24/7 to keep track of all payments, update balances and track your progress.
  • Improved credit score: Your credit score may take a hit the first six-12 months because all of your credit cards are closed. However, as on-time payments (the largest portion of your credit score) are reported, your score can make a strong comeback.
  • Financial education: Credit counselors are there to advise you throughout the repayment process and offer articles, workbooks and other financial literacy that helps you manage debt.
  • Phone stops ringing: No more calls from your creditors.

Cons of a Debt Management Program:

  • Only applies to unsecured debt: You can’t include student loan, mortgage or auto debt.
  • Penalty for missing payment: If you miss a payment, your debt management program may be canceled.
  • Cards go away: One of the provisions of the program is that you stop using your credit cards.
  • Not every company will accept a proposal for reduced interest rates: The smaller banks and possibly some of the department store or gas station card companies don’t always accept debt management programs.
  • Takes too long: Some consumers want a quick solution, and this isn’t one. It’s set up for 3-5 years, so payments remain at an affordable level and you have a better chance to succeed.

Is a Debt Management Plan for You?

Not all consumers are in debt for the same reason and that’s why there are multiple solutions for people trying to climb out of a financial hole.

The ideal candidate for a debt management plans is someone who has high-interest debt (i.e. credit cards) – and a steady enough income to handle that debt – but needs help creating a better budget to guide them down the right path.

Other factors to consider for debt management include:

  • Can I live without a credit card?
  • Will I be responsible in making a payment every month?
  • Will I be making an expensive purchase (home or car?) in the next year and need credit to get it?

Take a close look at your situation and see which side you fall on. If you’re not sure, or need help making a decision, call a nonprofit credit counselor at InCharge and get a free counseling session to determine how to create an affordable budget.

Other Debt Relief Options

Debt management plans might not be the right solution for your credit card problem, but there are other debt-relief options.

The alternative solutions could be:

Debt Consolidation Loan

If you qualify – i.e. you have a very good credit score – you would receive a loan that could pay off your credit card debt at a lower interest rate and monthly payment than credit card debt.  Unfortunately, you still owe the bank that gave you the consolidation loan so you’ve transferred the problem from one source to another.

Debt Settlement

Debt settlement is when a creditor agrees to accept payment that is less than what is owed on your credit card debt. Sound too good to be true? It is! There are a lot of negatives that make this a risky alternative. Your credit score will plummet, and you will find it very difficult to get a loan in the future because you didn’t pay back this one. This is something that only should be considered if all other avenues are closed. You may be responsible for paying taxes on the amount forgiven.

Bankruptcy

When the size of your debt overwhelms your income’s ability to pay, it may be time to consider a fresh start through bankruptcy. A successful bankruptcy filing will eliminate all credit card debt, but also leaves a 7-10 year negative mark on your credit report.

Do-It-Yourself Debt Management

You can absolutely set up a debt management program on your own. InCharge has published this guide on how to do it as well as a debt management template to organize your payments.

Frequently Asked Questions

How will a debt management program affect my credit score?

InCharge does not report your participation in a debt management program or plan to the credit bureaus, however your creditors might. Your credit score may decrease when your credit cards are closed and then increase as you make consistent on-time payments over the course of the program. Every person’s credit situation is different. In order to better understand how a debt management program may affect your credit score, learn more about how credit scores are calculated.

Can I open new credit cards while on a debt management program?

We strongly discourage you from opening new credit cards on a debt management program. Instead, we recommend creating room in your budget by reducing expenses and looking for ways to earn additional income.

Can I get a mortgage on a debt management program?

Yes, you can get a mortgage on a debt management program, as long as your credit score is healthy and your debt payments do not consume too high of a percent of your income.

How can I choose the best plan for me?

Make sure you are working with an NFCC-member nonprofit credit counseling agency like InCharge Debt Solutions. Nonprofit credit counselors provide impartial financial advice that has your best interest in mind. A nonprofit debt management program will have low fees and work to secure interest rate reductions on your credit card debt, so that you are able to pay off your debt by making consistent affordable payments.

How fast can I pay off my debt on a debt management program?

You should be able to pay off your credit card debt in 3-5 years on a debt management program or plan. Your payment will be based on five years of equal installments, paid monthly, but you can pay your debt faster. While you are on the program, we will share cost-savings strategies that will free up more of your household income to pay off debt.

What are the debt management program’s fees?

On average, the monthly fee is $33, depending on which state you live in and how much debt you have. If you decide to enroll in a debt management, there is also a one-time, set-up fee of $75 – though this fee also varies by state.

Will InCharge allow me to use credit cards?

Your creditors will require you to close your credit card accounts once you have enrolled in a debt management program.

How would I enroll in a debt management program with InCharge?

To start the process, call one of our credit counselors at 800-565-8953 or fill out our Get Help Now form. You will receive a free credit counseling session and our counselors will determine if debt management is the best solution for you.

How long is a debt management plan?

The average length of a DMP is 3-5 years, but is shorter for clients who decide to aggressively deal with their debt. Many clients pay down debt faster by using income tax returns, inheritance money or some other unexpected source of income. There is no penalty for paying the debt off early. You can make additional payments while on the plan and pay off your debt faster.

What benefits can InCharge provide with its program?

The No. 1 benefit is a lower monthly payment, and the potential of reduced interest rates. There is the convenience of making only one payment for all your debts. You also receive valuable education materials, including financial tips and reminders for payments due. InCharge clients can track their progress online, see their balances and what percent of their debt has been paid off.

Does InCharge keep my information confidential?

All information shared with InCharge is confidential. Please see our privacy policy for details.

How will enrolling in a DMP affect the interest rate on my credit accounts?

Many consumers see a significant reduction on interest rates from participating creditors. Typically, interest rates could be reduced to somewhere around 9% and sometimes as low as 2%. 

Is a debt management plan the only solution you offer?

After reviewing your situation and credit profile, our credit counselors may recommend an alternative solution such as bankruptcy.

What is the difference between bankruptcy and a debt management program?

Bankruptcy is a last-ditch attempt to settle debts. It is a legal proceeding through which you liquidate all assets in order to wipe out debt (Chapter 7) or persuade creditors to approve a repayment plan over a 3-to-5 year time frame to eliminate debt. There are severe consequences for both, including a drop of as much as 200 points in your credit score and the bankruptcy action remaining on your credit report for 7-to-10 years. A debt management program is not a legal proceeding. A notation that you are in a DMP could appear on your credit report, but there should be little impact on your credit score until you complete the program. At that time, you could expect your credit score to improve, sometimes dramatically.

Will InCharge stop creditors from calling me?

When you enroll in a DMP and start making payments, calls from enrolled creditors should cease.

How will creditors find out I joined a debt management program?

InCharge credit counselors contact the creditors to make them aware you are participating in the program and request lower interest rates and monthly payments. You also receive responses from creditors once proposals are accepted.

What happens if I can’t handle the payments?

InCharge counselors work with you to establish a debt management plan that allows you to make affordable payments every month. If your financial situation changes, call InCharge immediately and our credit counselors will review your situation.

Debt Management App

InCharge Debt Solutions clients have access to a Debt Management App that makes managing your accounts, checking your balances, and rescheduling payments easy and convenient. The Debt Management App also allows you to check your up-to-the-minute “debt free” percentage: “You Are 55 percent Debt Free.” Research shows that tracking a goal makes you more likely to stay motivated and accomplish it. With the Debt Management App, InCharge strives to be the “Fitbit” of the personal finance world.

Sources

About the author

Tom Jackson focuses on writing about debt solutions for consumers struggling to make ends meet. His background includes time as a columnist for newspapers in Washington D.C., Tampa and Sacramento, Calif., where he reported and commented on everything from city and state budgets to the marketing of local businesses and how the business of professional sports impacts a city. Along the way, he has racked up state and national awards for writing, editing and design. Tom’s blogging on the 2016 election won a pair of top honors from the Florida Press Club. A University of Florida alumnus, St. Louis Cardinals fan and eager-if-haphazard golfer, Tom splits time between Tampa and Cashiers, N.C., with his wife of 40 years, college-age son, and Spencer, a yappy Shetland sheepdog.