Debt Management Program
Debt Management Plans are designed to put consumers on a strict budget with the aim of solving their financial woes. Although they are sometimes unsuccessful, they can be very beneficial for some.
What is a Debt Management Plan?
A Debt Management Plan (DMP) helps consumers eliminate credit card debt in an expedited fashion by working with creditors to bring a borrower's accounts current, lower their interest rates and eliminate finance fees. This in turn means that more of the monthly payment goes towards reducing a borrower's credit card balances and principal on the debt amount. Another added benefit of a DMP is that once the terms of debt management program become established, the borrower will receive diminishing collection calls and credit card balances which will help them reduce their worrying and allow them to stress less about their current debt situation. Therefore, individuals enrolled in a DMP typically feel an increased sense of comfort regarding their debt repayment plan.
How Debt Management Programs Work
All reputable companies will always start with a 100% confidential and free debt counseling assessment. A counselor will ask a lot of questions in order to thoroughly assess a borrower's household income and expenses. Moreover, throughout the debt assessment, education is provided to help the borrower find places to reduce expenses and save additional money on an ongoing monthly basis. After this they will explore other feasible options and develop a customized budget and debt management plan in order to achieve their money goals and better their financial standing.
The Debt Management Program helps the program participant in eliminating credit card debt more quickly by bringing accounts current, lowering interest rates and waiving any late fees. Deposits are made directly to the agency and monthly disbursements are made to the creditors on behalf of the borrower. Program participants usually make one consolidated monthly payment and the agency pays the creditors through that consolidation payment. With this, the borrower is able to pay down the debt more aggressively and ideally setup a plan for financial success.
A Debt Management Plan usually allows the participant to pay off 100% of their unsecured debt within five years. Because many creditors agree to lower interest rates, more of the payment goes toward reducing the debt's principal and less is applied towards accruing interest. Collection calls and other correspondence will usually stop after a few months in the program.
Some debt management plans give the added option to include other priority payments (such as mortgage, car payment, utilities, insurance, etc.). In total, this becomes a great money management tool and allows the borrower to remain current and better manage all household expenses in aggregate. This prioritization of managing income and expenses is essential for the completion of any related debt relief program, not just a debt management plan.
Implications of a DMP
When participating in a Debt Management Program, all open lines of credit will typically be closed out whilst you are an active participant. The best way to successfully complete a debt management plan is by including all cards in the program. However, if the participant needs to keep one card for an emergency a deal can typically be worked out with the credit counselor to allow it.
There can be credit implications of participating in a Debt Management Program. Credit Counseling agencies do not actually report information to credit bureaus, that is done by creditors. Depending on the particular plan (and the borrower's creditors), the impact to a credit report may actually be positive or negative. Additionally, anytime open lines of credit are closed there will be a negative impact to your credit score since total credit availability and therefore utilization rate has decreased. So, if a participant's credit limit decreases you would see an initial dip in your credit worthiness. This is typically offset by paying monthly obligations in a timely manner (as this is the most important factor in determining a borrower's credit worthiness).
Are Debt Management Plans a Recommended Debt Relief Option?
As of late, debt management programs have been proven to be one of the least successful options in helping consumers become debt free and lessen their financial worries. There are multitude of reason for the lack of success in efficacy related to DMPs, but a lot has to do with the fact that people entering these programs typically have to pay more than they were before they got into financial trouble. Moreover, if you miss a payment or cannot afford to pay the company managing your debt and your revolving debt obligations, the credit counselors typically offer little to no assistance and leeway in terms of help. The program could be forfeit entirely due to this, leaving you with no results and usually making your situation worse than when it started.