Life On A Debt Management Program
There’s no sense sugarcoating it. Debt stinks, but getting out of it can be a pretty smelly proposition as well. That’s because it’s can be hard to conquer a mountain of debt, and most people don’t like hard.
Easy, as we all know, is much easier.
The problem is that taking it easy is not going to help when you are drowning in debt. A debt management program will help eliminate debt, but only if you are willing to endure the disciplined approach and possible hardships that come along with it.
The other popular option is to kick the debt can down the road until it flies off a cliff and you follow it into the abyss.
Millions of Americans have decided they’d rather not go bankrupt. If you are struggling with debt, should you join them?
To help you decide, here’s a look at what life is like under a debt management program.
The Setup Process
After months or years of only paying the minimum monthly fee on credit cards, you’ve realized you’re like a hamster running on a spinning wheel. The difference is a hamster isn’t being socked with exorbitant interest charges every month.
The average U.S household has $15,762 in credit card debt, according to a 2016 Nerdwallet.com study. With an average interest rate of 13.7%, that means the average family could pay more than $2,000 a year in interest if it makes only the minimum monthly payment.
Who wants to spend $2,000 a year just to stay even with a mountain of debt that high? There are plenty of other ways to get into debt, of course. But those little plastic cards are a major cause of trouble and stress.
“Credit cards are evil,” Ron Hynson said.
He contacted InCharge Debt Solutions and enrolled in debt management program. In a DMP, a client’s debts are consolidated and a counselor works with lenders to lower interest rates.
The client makes one monthly payment, which is lower than the combined bills used to be. The DMP company funds are distributed to each lender every month.
There is a monthly service fee for the DMP, and as soon as the agreement is signed a credit counselor will send proposals to his creditors outlining a payment plan. That process can take a few weeks, which means the annoying calls from collection agencies will not immediately cease.
Clients should simply inform collectors that they have enrolled in a DMP, politely wish them a nice day and hang up. The polite part is optional, but it never hurts.
Planning and Budgeting
You never want to go into battle without a plan of attack, so a key component of a DMP is credit counseling. A certified counselor will help you learn how to budget your salary and determine your best path to financial stability. Ferreting through your monthly expenses and revenue will determine how much can be paid on your debt.
You will get an estimate of how long it will take to complete your DMP, as well as a breakdown of the amount owed to each creditor and the payments they will receive.
A DMP typically takes 3 to 5 years to complete – if the client sticks to the budget.
What to Expect Once the Plan is Set Up
Expect some uneasiness at first, if for no other reason than your security blanket is being taken away. That blanket is your credit card(s), which you’ve been able to whip out whenever the need or want arises.
All but one of your cards are either cancelled or declared off-limits in a DMP. Additional credit card charges are disruptive since they affect your payment schedule and monthly amount.
Don’t worry, the initial credit-card withdrawal symptoms will pass. They will be replaced by a sense of relief. A DMP covers non-secured debt like credit cards and medical bills. Instead of juggling a bunch of payments each month, you’ll make only one and never again have to fret over late fees.
Calls from collectors should cease, though it may take up to three months for the billing cycle to reflect your new payments. If collectors call after that, just hang up don’t worry about being polite.
After anxiety and then relief, you should expect a sense of accomplishment when you see the program really kick in.
Your interest rates likely will drop 10% or more, which is real savings. For instance, say you have $20,000 on a credit card with a 21% interest rate. A minimum monthly payment would be $800.
If that’s all you paid and didn’t add any new charges, you’d have the card paid off in just under three years but pay $6,533 in interest.
If your interest rate was reduced to 12% in a four-year DMP, your total interest payments would be $5,276.
Take that, Evil Credit Card!
Enrolling in a DMP doesn’t mean a loss of financial freedom. It means a loss of the ability to abuse your financial freedom.
Just remember, it’s better to put $5 toward your debt than $5 toward a double-latte with pumpkin sprinkles at Starbucks.
Living on money you actually have, as opposed to credit, can be discombobulating at first. You can still have a credit card, but it should be used only in emergencies.
(Note: the Midnight Madness Sale at Macy’s is not an emergency).
The sad fact is that a lot of people can’t handle the hardships.
Precise figures are hard to come by, but a study by Cambridge Credit Counseling found that almost 50% of DMP enrollees do not complete their programs.
It’s important to find a debt management company endorsed by the National Foundation for Credit Counseling. In an NFCC study, 56% of people who enrolled in DMPs in 2010 had either completed the program or were still involved four years later.
Unfortunately, the other 44% had presumably just fallen off the debt cliff.
Benefits of Paying off a DMP Quickly & How to Do So
It’s pretty simple. The sooner you get out of debt, the better your financial situation will be.
If you need a loan but are on a DMP, you may still be able to qualify for one. On-time payments will help your credit score will improve, so you’ll get better interest rates if you need to buy a car or make any other major purchase. You will be able to start putting more money into an IRA or other retirement plan.
Turning the payoff clock ahead is relatively easy if you get a raise, an inheritance or a winning lottery ticket. The good news is there are plenty of other ways to make money these days if you are willing to try.
The bad news, at least if you’re not motivated, is that you’ll have to get a part-time job, try selling stuff on eBay or find some other revenue-generating pursuit.
You can also cut expenses. Don’t eat out, give up Starbucks, don’t’ run the air conditioner so much in the summer or heater in the winter, carpool, stay home for vacation.
All this belt-tightening can be uncomfortable. It helps to remember there is a light at the end of the debt tunnel, and plenty of people have found it.
Advice from Enrollees
The stories are different but they’re all basically the same. A person gets caught in the debt trap and can’t get out.
It’s usually not for a lack of trying. But they either lack the knowledge and/or the willpower to succeed in a debt management program.
That leads to problems beyond paying bills, like anxiety and depression. Then they hear about debt management programs and figure it’s worth a try.
“It sounded like a great plan,” said Hynson, who had $30,000 in credit card debt when he called InCharge.
His personalized plan called for the debt to be paid off in four years. Once he got used to the routine, Hynson was like a lot of DMP clients.
At last, he was in control. He felt empowered and started putting all he could toward his DMP. That meant giving up vacations and cutting back on socializing and living a simpler life.
“Don’t live beyond your means,” Hynson said. “If you see something you really want, ask yourself, ‘Is it a want or a need?’”
Successful clients usually find their minds are reprogrammed. The budgeting lessons and lifestyle they got from a DMP carries over after the last payment is made.
Hynson made his three months early and has become one of the thousands of DMP disciples. Their message is simple.
Life under a debt management plan can stink. But in the end, you can bask in the sweet smell of success.
NA. 2016, August 1. Do Debt Management Plans Work? Retrieved from http://www.chicagotribune.com/business/ct-personal-finance-nerdwallet-debt-management-plan-20160801-story.html
Clements, N. 2016, March 25. The Risk And Rewards Of Consolidating Credit Card Debt. Retrieved from https://www.forbes.com/sites/nickclements/2016/03/25/the-risk-and-rewards-of-consolidating-credit-card-debt/#32fcd23f68ad
El Issa, E. ND. 2016 American Household Credit Card Debt Survey. Retrieved from https://www.nerdwallet.com/blog/average-credit-card-debt-household/