What is a Debt Management Plan?
If you are in a position where you owe more than what you make, then a debt management plan may be the answer for you. What is a debt management plan? It is a structured plan designed to help those struggling to pay off their debt by consolidating them into one monthly payment and reducing monthly rates.
What are some other benefits of debt management programs? Debt management programs work for those who have a good credit score as well as people with bad credit scores. Additionally, with the best repayment program, your creditors will stop sending you harassing calls and letters demanding payment. Lastly, and maybe most importantly, you will have access to financial counseling that provides advice on how to avoid bankruptcy while paying back your debts!
Let’s explore it in detail below:
How a Debt Management Plan Works?
If you can’t make your monthly credit card or loan payment and don’t know where to begin with too much debt, explore “What is Debt Management Plan?” You can avoid defaulting on loans or declaring bankruptcy, which can have negative impacts for years after repayment.
Debt management plans do precisely that. For a debt management plan, you work with an agency that helps set up new repayment plans to help make your payments more manageable. The following steps should help you understand how the repayment plan works.
- Prioritize your debts: If you have several debts to pay, you should create a priority. Usually, non-priority debts such as store cards, credit cards, and loans. Before going ahead with a DMP, you have to ascertain that you can pay off your rent, council tax, and mortgage. However, if you find it hard to repay your priority, it wouldn’t be wise to get into another plan -DMP.
- To pay or not to pay for DMP: There are many DMP advisors that will charge a reasonable sum of money for their professional help. However, you are not obligated to work with them. Rather, you may choose a free advisor instead if you choose.
- Prepare a budget: The borrower, along with the debt advisor, works out the amount you can pay every month. These advisors will help decide the right amount by looking at the budget. Then this amount (lower amount) is conveyed to the creditor. The creditor may or may not agree to the amount. However, sometimes they decide to freeze all charges and interests on the said debt.
- Communication: If the creditors want to contact you at any given point in time, ask them to talk to the advisors. If there is any change in the plans, consult the Personal Finance team.
- The repayment: After that, the borrower can continue paying off the debt till it is paid off completely. Or the individual is financially equipped to pay off the debt in full.
When to Consider a Debt Management Plan
A debt management plan is not for everyone. Not all borrowers can benefit from it equally, and the reasons vary considerably. For instance, if someone’s credit score is already low due to some missed payments, DMP is for you.
Another example. Suppose you have an unsecured credit card debt, and it is 35% of the money you earn in a year. You have a stable income, and you believe you can pay off the debt in the next five years, provided the lower interest rate is low. Also, you can manage your expenditures without falling for another credit. Then you can consider DMP. Consult a credit counselor and chalk out the road ahead.
Note that when looking to lower your credit card rates, DMP is a great option.
Debt Management Plan: Pros and Cons
Debt management plans have their share of pros and cons. We have listed both in-depth to help you understand the procedure and decide whether it is a viable option for you.
DMP is affordable for people with multiple creditors. It can be rolled into one fixed monthly payment.
DMP can cost you more than other debt payment solutions as the borrower is obligated to pay back the total amount.
For instance, with an individual voluntary arrangement (IVA), a borrower can get 90% off.
|Ends the harassment
DMP puts an end to harassing calls or letters.
Your role ends when they agree to the debt payment plan. After that, the debt management agency will take over. All correspondence and negotiations will be with them.
|DMP proposal rejection
A creditor may or may not agree with the terms of the DMP proposal. In such circumstances, look elsewhere.
If all goes as planned, you may reach an agreement of monthly payment with your creditors. The creditors may accept freezing interest rates or charges. This could reduce monthly payments.
|DMP isn’t a viable solution
In comparison to other insolvency solutions, DMP lasts longer. It can go on for ten years, while other debt payment solutions end in 5 to 6 years.
|Good for the credit score
A DPM shows that you are interested in paying back to your creditor and looking to waive off, and not seeking insolvency solutions such as bankruptcy.
|Bad for the credit score
Initially, you agreed to pay a certain amount. But now, under the DMP, you are paying less. These transactions are recorded in the credit file.
Formal insolvency solutions have some T & Cs. If you declare yourself bankrupt, it will get registered in the public register. This can affect your future employment opportunities.
|Is an Informal solution
DMPs are formula solutions. The creditors may cease to correspond. Since they have no legal obligation, you can only wish they would contact you.
The biggest drawback is that the Debt Management Plan is not protected by law. You can expect to receive a court’s judgment against you even if you have agreed upon a plan with the creditor. That was a comprehensive description of “What is a debt management plan”. But are there more plans? Let’s find out.
Alternatives to a Debt Management Plan
What do you do if you don’t qualify for a program? Often, a professional debt counselor can help you understand the intricacies of the program. So look to the U.S. Department of Justice and the National Foundation for Credit Counseling.
If you do not qualify, then there are some great alternatives for those who do not like the idea of debt management programs/plans. These include primarily the following.
- Debt consolidation
- Debt settlement
It is the process of rolling up multiple high-interest debts into one lower-interest debt. Its primary benefits are that it reduces the number of debts you carry which, in turn, generally increases your credit rating. It also reduces the number of payments and fees, which could ultimately save you quite a lot of money on interest over time. You should never consolidate unsecured debts with secured ones – i.e., mortgages – because it creates a dangerous situation for you where one missed payment can lead to foreclosure and a ruined credit score.
Debt settlement is when a debtor and creditor come to an agreement that forgives part of the debt owed. Debt settlement is based on the idea that creditors won’t want to take time and money trying to collect from someone who will never repay their debts. Generally, people seek this option because they face bankruptcy or foreclosure or have been unemployed for an extended period.
Bankruptcy is the declaration by a bankruptcy court that a debtor’s obligations to creditors are outweighed by the nonexistence or inadequacy of their assets. When someone declares themselves bankrupt, they, in most cases, can have some of their debt forgiven and absolved. Remember that bankruptcy is usually not an easy process; It would be best to contact a financial advisor specializing in insolvency/bankruptcy before deciding whether or not this may be your best option. That way, you will understand for sure if it’s the right decision.
Individual Voluntary Agreement
An Individual Voluntary Arrangement (IVA) is a formal agreement between you and your creditors to pay off debts over time at an affordable, fixed monthly rate. This would cover a period of five years. The repayment package in an IVA is agreed by parties to be based on the debtor’s future income, capital cash available from other sources, and personal expenses such as food, clothing, housing, etc. After this period (if you complete it successfully), any remaining debt will be written off and discharged by the courts.
In conclusion, the answer to “what is a debt management plan?” tells us that it is a great way to make monthly payments more manageable. If you have been considering one for yourself or your family members, this post has given you much of the needed information to know whether it may be right for you. We hope that these points help, and please don’t hesitate to contact us if we can assist in any other way!