The pros and cons of a debt management program

A debt management plan, also called a DMP, is a type of debt consolidation repayment plan arranged between you and a credit counseling agency. The credit counseling agency would negotiate with your creditors on your behalf to secure improved terms on your existing debt amount.

Debt management is often considered as a popular debt relief option by many people. Consumers who use debt management plans are usually under 60 days late on their debt payments. While debt management plans with trustworthy credit counseling agencies have been reported to help consumers manage their debts, these plans don’t work for everyone.

Prior to signing up for a debt management plan, it’s absolutely essential that you understand how it works. Like any other debt solution, a debt management plan has its pros and cons and some of them are given below:

Pros of a DMP

1) Interest rate reduction

Most creditors accept reduced interest rates which can reduce your monthly payments by 25%-50%. They do this because they don’t want to write off your account as a bad debt, which would typically revalue it  at only 20% of the amount owed. It’s a better debt relief choice for you because a bad debt write-off would considerably hurt your credit score.

2) Waiving of late fees

When you’ve enrolled for a debt management plan, creditors would waive your late fees as you’re making a sincere effort to pay off your debts. This is an advantageous position for you because these fees would normally be added to your debt burden, making it heavier.

3) Stop creditor harassment

As soon as a creditor agrees to an offer by the credit counseling agency and starts receiving payments from them, they would stop calling the you instantly. They understand that the you are trying to pay them back

4) One consolidated monthly payment

Starting a DMP rolls all your unsecured debts, including credit card debts and unsecured loans, into a single and affordable monthly payment. You just need to send this to the debt management company and they would subsequently allocate it to your creditors.

5) Alternative to bankruptcy

A debt management plan can be initiated quickly and as soon as creditors know that they will be getting a payment, most would rather accept it than get nothing if you go for filing bankruptcy.     

6) Re-aging of accounts

Some creditors are ready to re-age an overdue account so that it is stated as current. This current payment status can help you rebuild your credit.

7) Smaller repayment term

A DMP enables you to pay off your debts within 3-5 years. This is usually less than standard debt repayment, which might take several years longer.

Cons of a DMP      

1) No new credit lines

The biggest disadvantage of a DMP is that you’re barred from opening new lines of credit as long as you remain in the program. Usually, a program runs for 3-5 years. This is to make sure that the creditors receive the whole amount of debt.

2) Debt management fees

You would usually have to pay a fee for the debt management plan you’re in. For profit debt management companies have a propensity to ask for higher fees, frequently up to $50 each month or even more on certain occasions. Upfront fees are also charged. Most non profit companies ask for $30-35 every month and some have no upfront fees at all.

3) Secured debts can’t be paid off

Secured loans like mortgages and car loans can’t be included in DMPs. They are to be paid off separately.

4) Not everyone qualifies

Debt management doesn’t suit everyone. Some people don’t like it and others don’t qualify for it. But for some individuals, the right DMP can be precisely what they’ve been searching for - a planned, methodical way to get out of debt and regain financial stability.