Managing your debt can be extremely stressful and have a significant impact on your future financial goals. Many times, when debt seems to be out of control, we often do not see the options that are available to help get us back on our feet.
Debt management is one solution. A debt management plan (DMP) is basically an agreement with creditors to repay debts over a more extended period. It does not necessarily mean you will pay less overall.
A debt management plan is not a debt consolidation loan or a debt settlement program. It is a plan that helps consolidate unsecured debts to lower monthly payments through a reduction of interest rates and penalty fees. The goal behind a debt management plan is to help you pay off your debts and have a fresh start. DMP is helpful to individuals with high-interest credit card debt or other unsecured debts. Secured debt does not typically qualify.
How Debt Management Plans Work
Typically, if you sign up for a debt management program through a credit or financial counseling agency, you will list all of your debts and income. The agency will mediate and reach out to your creditor to negotiate interest rates and a payment plan that will work with your financial situation.
The debt management company prepares a Statement of Affairs (SOA), which is an estimate of all income, and presents it to the creditors. Creditors then have a choice to agree or not agree to the new terms.
Once an agreement is made with more favorable terms, payments should be more manageable as one monthly payment. You will pay one amount to your debt management company, and they will take that payment and disperse it between your creditors. Your stress is alleviated just knowing you no longer have to juggle with due dates on multiple accounts or worry about where the funds will come from.
When you stay current with your new planned payment schedule, you won’t have to worry about late fees or collection calls. That is one more stress factor elevated because your debt management plan will be built around your specific debts and income. A debt management plan may be a great debt solution for many.
Who qualifies for DMP?
Just about anyone who has unsecured debt can benefit from a debt management plan. People who are facing a cash flow problem, or cannot take out a consolidation loan, or do not want to use their home equity seem to benefit the most. Debt management programs can help with unsecured debts such as credit cards, medical bills, and any installment loan that is not backed by collateral, as they are the most common debts. Other unsecured debts that may be eligible for the debt relief plan consist of utilities, rent, and cell phone services, and gym memberships.
If you have a steady income but are struggling to make your monthly payments, then a DMP may be an excellent choice for you. A DMP can reduce most or all of your high-interest credit card rates, allowing more of your monthly payments to go towards the principal. This will enable you to pay down your debts quicker with a lower monthly payment. Most debt management plans can be tailored to be repaid in full within 10-15 years.
Because this is not a consolidation loan, a history of missed payments does not disqualify you for a debt repayment plan. Most unsecured debts qualify; however, some may not be eligible for a debt repayment plan.
Advantages of a debt repayment plan
A major selling point of the debt management plan is that it is flexible. With respect to an individual’s changing circumstances, debt management plans can be reevaluated at any time during the repayment process.
Debt repayment plans can help create a more realistic budget and better help you become organized and punctual when making a payment. This will significantly improve your credit report and credit score over time. One unique benefit of using a debt management plan through a nonprofit credit counseling agency is that it comes with constant support and assistance from a team of trained financial educators and counselors. If you’re independent and only need the improvement of a lower interest rate and consolidated payment, then a low-interest consolidation loan may be what you need. But if you feel you might need a little extra support in sticking to your new goals, then a debt management plan may be the way to go.
Debt management plans can help ward off the unwanted calls from creditors. This is especially useful for those who are struggling to pay on their current debt repayment schedule.
Can creditors refuse a DMP?
Yes, creditors can deny a debt management plan if they feel that you may have more money that you can pay towards your debt. Typically, they determine that at the onset of the DMP SOA by looking at your financial situation. You will need to have a fair and consistent repayment for your creditors and outline details on how much you can afford to pay back each month.
Some creditors may even threaten legal action to attempt to get you to pay your debt even after rejecting your DMP. If your DMP is denied, the best thing to do is to make the minimum payment amount you proposed regardless of whether they agreed to it. This shows that you are in good faith, trying to complete your obligation. Because creditors cannot refuse payment even if the amount is reduced or less than owed, you may be able to buy some time before reaching a final debt arrangement. DMP negotiations can take months to reach an agreement.
If you are feeling pressure from the creditors, and you have offered as much as you can afford, do not agree to pay more. If you agree to pay an amount out of the scope of your financial budget, it could cause your DMP not to be as beneficial to you.
When you’re struggling with debt, your first step should always be to educate yourself about your options so you can make the best decision for you and your family. Turning to debt counseling may be beneficial to help you determine what is best.
If a DMP doesn’t seem to be a suitable option for you, you may wish to seek an alternative debt solution. You should seek professional advice before entering into any debt solution. Get the best debt advice and information possible and get the help you need by contacting Roundleaf Inc.
Our goal is to help you achieve your financial goals through educated decision making. We are here to help put a plan into place by giving you as much information as possible so you can make the most out of your future.