One of the most overwhelming parts of being in too much debt is juggling all the payments. Payments typically come due throughout the month, and it’s easy to forget to pay a bill, further complicating your problem. It’s also hard to make sure you always have money available when different bills come true.
While there are DIY strategies to help you get your debt under control, sometimes you need a little extra help managing your debt. A debt management plan is one option to consider.
A debt management plan acts as a middleman between you and your lenders. Similar to debt consolidation, your plan rolls all your debt payments into a single payment and then disperses your single payment to your different loans as those loan payments come due. This is also similar to the escrow payment that you often pay along with a mortgage payment. In the case that you can afford more than your minimum payments, a debt management plan will act in your best interest and strategically decide where to apply your extra payments.
The agency managing your plan may also attempt to negotiate terms with your creditors to help alleviate some of your debt burden or to make your payment more manageable.
Who Offers Debt Management Plans?
Debt management plans are typically offered by credit counseling agencies with the specific intention of getting you out of debt, or at least getting your debt back under control. These credit counseling agencies often provide financial education, including budgeting help, alongside their debt management services to help you get out of debt and stay out of debt. Note that as part of this financial education and counseling, you will typically not be allowed to take on any new debt. This also means you will be required to close all current revolving debt, such as credit cards and lines of credit.
The Benefits of a Debt Management Plan
Perhaps the most obvious benefit of a debt management plan is simplifying your finances. Paying a mountain of bills every month can be overwhelming and depressing. And if a debt management plan helps you avoid missing a payment, that alone can be worth it.
Additionally, a debt management and the counseling that comes with it can help motivate you to continue paying down your debt. The credit counseling can help you make better financial decisions to get you back on track.
Participating in a debt management plan may make it easier to re-negotiate your debts. Participating in a debt management plan may signal to lenders that you are serious about paying down your debt. If they now see you as a less risky borrower, they may have reason to renegotiate.
Perhaps most importantly, unlike other options, such as bankruptcy, debt management plans will not have a serious negative effect on your credit, and may actually have a positive effect. This avoids the 7 to 10 year process of rebuilding your credit that typically follows bankruptcy.
The Downsides of a Debt Management Plan
Although debt management plans may be right for some people, they are not necessarily the best solution for everyone. For one, plans often come with startup fees and monthly maintenance fees, often between $20 and $40 per month. Although these are often negated by the savings in interest charges, they may impose enough of an extra burden to make the debt management plan more of a hardship.
Debt management plans also require a certain amount of trust. You need to trust that the credit counseling agency handling your debt is indeed managing your debt in your best interest. You also trust that they are negotiating as hard as possible with lenders. And finally, you trust that they do indeed make your payments on time. While there are standards and certifications for credit counseling agencies, these agencies are run by humans. There is always a potential for mistakes or dishonesty.
Debt management plans also typically do not handle secured debt such as a mortgage or vehicle loan. If these loans are causing the most headache for you, a debt management plan may not solve your problems.
Also, in some situations, especially if you still have good credit, a debt consolidation loan may be more beneficial than a debt management plan. Although on your end, they both roll all your debt into a single payment, a debt consolidation loan actually pays off your other loans, while a management plan simply manages them (hence the name). If you have a lot of high-interest debt, for example, eliminating this with a consolidation loan will likely be more effective than a debt management plan.
In more extreme cases, a debt management plan may simply not go far enough. If your debt payments take up so much of your income that you are struggling to meet your basic needs, the clean slate that bankruptcy delivers may be far better than a debt management plan or debt consolidation.
Debt Management is Just One Tool of Many
A debt management plan isn’t for everyone. However, it is a good option for many, and a good option to consider if you need help with your debt. Consider your circumstances. Decide whether you can attack your debt on your own, or if you need professional help. Decide whether you can pay your debt down, or whether you need to have your debt legally discharged. You may find that a debt management plan is the perfect solution for your circumstance.