What is a Debt Management Plan? And is it Right for You?

By Mike Peterson
In July 31, 2015

Wouldn’t it be great if it were as easy to get out of debt as it is to get into debt?  All it takes is a few months of overspending to create a mound of debt that can take decades to pay back.  There’s no quick fix when it comes to paying off credit cards – and that’s especially true if you’re dealing with several cards with high balances.

I’ve written countless blogs about strategies you can use to pay off credit card debt.  There’s the snowball method and the snowflake method.  You can delay or postpone purchases to free up more money for credit card payments.  If your credit’s good enough, you can take advantage of low- or no-interest balance transfer offers.

But what happens if you’re so deeply in debt that the conventional repayment strategies don’t seem to help?   What happens if you can’t afford to make your minimum payments?  Or when the combination of a sky-high credit card balance and astronomical interest rates make it nearly impossible to make any real progress toward debt reduction?

It may be time to consider a debt management plan.

What is a Debt Management Plan?

A debt management plan, or “DMP,” is just what it sounds like.  It’s a formal plan that helps people manage – and repay – their high-interest credit card debt.  DMPs are arranged through credit counselors.

A typical DMP process works like this: You meet with a credit counselor, who reviews your financial situation – including your monthly income, your expenses, and your total amount of debt.  If your credit counselor decides that you’re a candidate for a DMP, he or she will negotiate with your credit card lender to secure more affordable monthly payments, a lower interest rate, or both.

One unique thing about a DMP is that, once you’ve got an agreement in place, you stop making credit card payments directly.  Instead, you pay your credit counseling company, and they distribute the funds to the appropriate credit card companies.  If you’re behind on payments, your credit counselor will also help handle any calls from debt collectors.  This arrangement lasts until your debt is paid in full.

Is a DMP Right for You?

Not everybody is a good candidate for a debt management plan.  You may be eligible for a DMP if:

ü  You’re considering bankruptcy due to debt;

ü  You can’t afford to make your monthly payments;

ü  You’ve fallen behind on one (or all) of your credit card payments;

ü  You continue to pay your monthly payments – but can’t seem to reduce the amount you owe.

 

 

The Benefits

The biggest, most obvious benefit to a DMP is that, when you opt for a DMP, you get access to better interest rates and more affordable payments.  The lower payments help make it affordable to keep paying down your debt, and the lower interest rates help you take a bigger bite out of your principal balance.

 

Another benefit of a debt management plan is that you’ll get support and guidance as you work toward a debt-free future:  Your credit counselor will help you create and manage a household budget, and your debt counseling company may give you access to further training or online resources that can help you become more financially savvy (and we could all use more guidance when it comes to basic finance).

 

Choosing a Credit Counselor

If you’re looking for debt advice, you may be interested in credit counseling.  To make sure that your credit counselor is working in your best interest, opt for a nonprofit debt counseling company.  Also, be wary of a counselor who immediately tries to push you into a DMP without carefully reviewing your debt and finances first.  A debt management plan is a good option for some people – but it’s not the only option, and it’s not right for everyone.

 

The Drawbacks

While DMPs offer several benefits, they do come with a few minor drawbacks:  For one thing, a DMP may show up on your credit report, which means that if you apply for a new loan or line of credit while you are still in your DMP, you probably won’t be approved.  This makes sense, if you think about it:  A creditor may not want to offer you any new credit while you’re still working toward paying off your existing debt.

 

Another drawback is that credit card companies may freeze, suspend, or cancel your existing accounts until you’ve paid off what you owe. Because you are trying to get out of debt, they won’t give you an opportunity to go further into debt by making new purchases.

 

But these drawbacks aren’t all that bad, when you think about them: After all, if you’re struggling with debt repayment, the last thing you should do is apply for new credit. And you really shouldn’t be using your credit cards, anyway.  These restrictions help you stay the course as you continue to pay down your debt.

 

The Bottom Line

If you are currently struggling to get your finances under control and repay your credit card debt, a debt management plan may be the way to go.  Considering a DMP?  Contact a nonprofit debt counseling company and speak to a credit counselor – he or she can help you decide if a debt management plan is right for you.

 

Want to learn more about debt repayment plans or other debt repayment strategies?  You can always contact the Debt Guru team today for a free debt consultation.

 

Mike Peterson

Mike is the author of “Reality Millionaire: Proven Tips to Retire Rich” and he has been published in a variety of local and national publications including Entrepreneur Magazine, Deseret Morning News, LDS Living Magazine, and Physicians Money Digest. He holds a B.S. in business administration from the University of Phoenix.