A Debt Management Program (also called a debt management plan) is a carefully constructed financial plan to pay off unsecured debt without taking out a loan. It often requires clients to stop using credit cards and make monthly payments to a credit counseling agency. A debt management program ideally provides you with lower monthly payments and a lower interest rate.
A Debt Management Program or Plan consolidates your monthly credit card debt payments into one payment. A Debt Management Program can save you money by reducing your interest rates and waiving late and over-the-limit fees, so that you can pay off your debt in three to five years.
What’s life like on a debt management plan? Paying off your debt can mean sacrifices, but if you qualify, that means you should have the income to successfully finish. And, on InCharge’s DMP, we let you keep one credit card open, for emergencies.
You can qualify for a debt management plan with as little as $1000 in debt, though the average client has $15,000. A debt management program includes credit card accounts, but the plan also pays medical bills and other debts. Ask your credit counselor what can be included on your program.
This video illustrates how InCharge’s nonprofit debt management program consolidates your debt payments and helps you get out of debt in three to five years.
Debt can be a confusing subject, especially when you’re heavily into it, which most Americans are.
In the United States, total consumer credit – debt incurred for purchasing goods or services – is $3.1 trillion. Nearly forty percent of America’s 120 million households carry a balance on credit cards. The average balance for each home that carries credit card debt is $7,200.
A Debt Management Program can help families and individuals struggling with that much debt.
A Debt Management Program is a carefully constructed financial plan to eliminate unsecured debt without taking on a loan. It often requires clients to stop using credit cards and make monthly payments to the credit counseling agency, which uses the money to pay off creditors.
A Debt Management Program is not a loan. The counseling agencies communicate with creditors to reduce the interest rate and lower or waive late fees so that monthly payments go down. The agencies work in the client’s favor, saving them time and money in paying off the debt.
InCharge’s nonprofit debt management program is customized to your situation, based on the information we gather about your income and debts. Our debt management solutions are also customizable, allowing you to include or remove accounts in the program.
FICO, the best-known of several companies that calculate personal credit scores, says that a debt management programs will not affect a person’s credit score.
Participating in a debt management program may be noted by a creditor, but that does not negatively impact the score.
InCharge considers itself a partner in a Debt Management Program and communicates with clients often to prevent late payments. The typical program runs from 36-to 60 months, but if the client stays engaged, he leaves credit card debt free.
The National Foundation for Credit Counseling (NFCC), the national organization that certifies credit counseling agencies, demands an educational component from all its members.
A good counseling agency teaches clients the root causes of debt so they understand why they are in this position to begin with. The education process includes monthly newsletters, financial calculators and help with setting up and maintaining a budget.
InCharge clients have access to I’m InCharge, an online account tool with up-to-date information on debt balances as well as the I’m InCharge Mobile App.
In very basic terms, Debt Management Programs seek a reduction in interest rates and monthly payments with no impact on credit scores. Debt Settlement seeks to negotiate a payment that is less than the balance owed and has a considerable negative impact on a credit score. Debt Consolidation seeks one monthly loan payment that will pay off the debt. Impact on the credit score varies.
Debt Settlement is making a deal with creditors to pay less than the total balance owed. As attractive as that sounds, there are some severe penalties, notably to your credit score and tax liabilities.
Debt Settlement usually involves attorneys. There are fees involved, typically a percentage of the settlement amount, which can be significant.
Typically, the attorney asks the client to stop making payments to the creditor and instead, contribute money on a regular basis to a fund. When the fund reaches a certain level, the attorney will approach creditors and seek an agreement to settle for that amount.
The client will be expected to provide the creditors with documentation of their financial status, meaning income, assets and all debts. Creditors want verifiable proof that the person can’t pay before they agree to a Debt Settlement. They are very suspicious of someone just trying to save money by paying less than they owe.
If the creditor accepts the agreement, the debt is considered settled. However that is not the end of the story.
The client must report the amount forgiven on their taxes as income. For example, if the creditor forgives $5,000 of a $10,000 debt, that $5,000 must be reported to the IRS as income and the client must pay taxes on it.
Finally, there is the matter of how it affects a credit score. In the above example — $5,000 forgiven on a $10,000 balance – the credit score companies see that as a negative because only half the debt was actually paid.
The person ran up $10,000 in debt, but paid only $5,000 of it. There is concern about the risk of not having a debt paid in whole in the future, thus there is a negative impact on the overall credit score.
Debt Consolidation Plans involve packaging all debts together and paying them off by taking out a loan at reduced interest rates. The lower rate is often secured by using other assets, such as a home or automobile.
For example, a person with three or four credit cards, might owe a combined $20,000 on the cards and be paying something like 24 percent interest. The credit counseling agency representing him could go to a bank and negotiate a loan at half that rate and save quite a bit of money in interest.
The loan money would be used to pay off the credit cards, creating a zero balance on each card. Instead of making three or four payments every month, the person would have only one payment.
There are some similarities between Debt Consolidation Plans and Debt Management Programs, but one glaring difference: Debt Consolidation Plans don’t require a client to give up their credit cards. That leaves the temptation to run up more debt, which only extends the problem.
A debt management program or plan (also referred to as a DMP) is a structured repayment plan that combines all of your monthly debt payments into one, affordable payment so that you can pay off your debt in three to five years. Interest rates on your accounts are generally lower on a DMP, than what they were originally.
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.
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.
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.
If you decide to participate in our debt management program, there is an average set-up fee of $40, and an average $25 monthly fee, not to exceed $75 and $55, respectively.
InCharge Debt Solutions clients have access to the “I’m InCharge” Debt Management App that makes managing your accounts, checking your balances, and rescheduling payments easy and convenient. I’m InCharge also allows you to check your progress in real time, providing details on your progress, including how much debt you’ve paid off, how much debt you have left and your up-to-the-minute “debt free” percentage, as in “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.
Someone with $15,000 in credit card debt paying 20 percent interest would pay $456 a month over 48 months to eliminate the debt. That is $22,344, including $6,922 in interest.