What is a Debt Management Plan?
A debt management plan, or DMP, is a payment program offered by credit counseling agencies to help consumers eliminate debt. It is aimed at consumers with a lot of unsecured debt, and most commonly used in cases involving numerous credit cards.
A DMP will consolidate your debts into one monthly payment. You pay the credit counseling agency, and they pay your creditors. The benefit of a DMP is that they work with creditors to reduce the interest you pay on your debt, which should lead to a lower monthly payment. The goal of a DMP is to provide a simple road map toward becoming debt free.
The most trusted debt management companies are nonprofit credit counseling agencies. They provide free counseling to help you budget your expenses and weigh options for debt relief.
What Are the Benefits of a Debt Management Program?
The primary benefit of a debt management program is that it will give you time and a game plan for eliminating debt. Here are some of the top features:
- Lower interest rates – Debt management companies work with your creditors to reduce the interest rate on your debt. Creditors will be more willing to relax your interest rates when they see you are on a payment schedule with a debt management company. The average client in a debt management program pays 8% interest, compared to the 15.51% that is the national average for credit cards as of March 2017.
- Reduce monthly payment – A lower interest rate means that you can pay less each month and still stay on track to eliminate debt, usually in 3-to-5 years. Or you can keep the same payment and save money on the back end by paying off the debt faster.
- Credit score no factor – A debt management plan is not a loan, thus you will not be penalized if you have a low credit score. Any credit score can qualify.
- One monthly payment – Make one monthly payment to the debt management company rather than multiple payments to multiple creditors. A DMP will handle your payments, giving you peace of mind.
- Limit damage to your credit score – The major reason your credit score is tanking is because of large balances owed to creditors. You are using a high percentage of the credit limit on your card. Paying down that balance through a DMP will improve that portion of your credit score over time. Initially, your score will take a hit because you need to close accounts, but the difference will be made up in time.
- Develop smart money practices – Successfully completing a debt management program means that you lived within your budget and made required monthly payments. That is something you carry over when you are debt free so you can avoid a repeat.
- A calculated plan – A debt management plan is a road map toward becoming debt free. That means there is an actual destination, a specific end-date. Your monthly payment is worked out with a credit counselor and calculated based on your budget. All the interest and balances are baked into your monthly payments. Just make each payment on time and you will finish on schedule.
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.
Customize Your Debt Program
InCharge’s nonprofit debt management program is customized to your situation, based on the information we gather about your income and debts. Using InCharge’s online debt management software (enter by clicking the Get Debt Help button above), you can see a full list of your debt balances from your credit report, interests and years to pay off. We help you compare this information to interest rates, payments and years to pay off on the program. You can add and/or remove creditors from your program, customizing it to your needs.
If you prefer to speak with a certified credit counselor, call the number above. Both our online counseling program and telephone counseling are designed to provide a debt solution that fits your financial situation. Depending on your income and debt load, we may recommend bankruptcy or debt settlement.
If a debt management program is the best debt program for you, you can count on your debt being eliminated in 3-to-5 years.
Qualifying for Debt Management: A Step-by-Step Guide
- Your credit counselor (or our online counseling program) will collect data from you on sources of income (weekly pay, bank accounts, etc.) and expenses such as mortgage/rent, food, utilities, clothing, credit card debt, etc. to better understand your current financial situation.
- Your credit counselor pulls your credit report from one of the three major credit reporting bureaus. The credit report is used to verify information such as name, address, social security number, etc. It also helps verify information on who you owe and if you’re delinquent. This is considered a “soft pull” meaning there will be no impact on your credit score.
- The counselor comes up with a budget that evaluates monthly expenses versus monthly income and whether you have a surplus or deficit at the end of the month.
- At this point, the education process begins. The credit counselor provides access to educational resources (books, handouts, links to articles) on various aspects of your budget. Your budget is measured against the national average in six categories.
- If you are running a deficit in any of the six categories, you’ll receive suggestions for turning that around. Your credit counselor may refer you to social services that could increase your income or provide free benefits such as food, clothing, assistance with medications and places to get help paying rent or utilities. These services are free and you can use them anytime.
- Now, your credit counselor evaluates your situation to determine if a debt management plan is the best solution. The final recommendation is based on your goal and the best solution to reach that goal, which often is a debt management plan.
- If the best solution is not a debt management plan, your credit counselor will recommend an alternative solution best fitted to reaching your goals.
- If you accept the recommendations for a DMP, your counselor compiles a benefits summary. That summary highlights the monthly reduction in debt payment, in addition to the interest savings on each account. It also lists any fees that may be associated with the program.
- When you sign the agreement, the counselor notifies your creditors and works with them to reduce interest rates and lower your monthly payment.
- Most creditors agree to the terms immediately. Some could make a counter-offer based on the status of your account.
- When all sides agree on the terms and conditions, the account becomes active.
- Your monthly payment is sent to InCharge, which then distributes a specific amount to each creditor, according to the agreed upon terms.
- It is important that your payment to InCharge be made on time every month, or the creditors may cancel any concessions they made on interest rates and/or fees.
- You will receive monthly statements from both InCharge and the creditors. Compare the monthly statements to make sure payments are credited properly.
InCharge provides a welcome kit to each new client that includes a phone number you can call anytime to discuss your situation with our credit counselors. They provide ongoing service and advice throughout the time you are in the program.
If your situation changes and you suddenly have enough money to pay off your account, you can do so at any time, with no penalty.
If all goes as planned, within 3-to-5 years you will be debt free and floating on top of the world.
Debt Management Solutions
Will A Debt Management Program Affect My Credit Score?
FICO, the best-known of several companies that calculate personal credit scores, says that a debt management program 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.
Financial Education Is A Vital Element
The National Foundation for Credit Counseling (NFCC) requires member agencies like InCharge to provide free financial education.
Debt Management Program clients receive a welcome kit with a personal finance workbook, budgeting tools, and links to financial calculators and money-saving articles.
DMP clients also have access to “I’m InCharge” an online account management tool with real time information on debt balances as well as the I’m InCharge Mobile App.