Information to know about debt management plans

Debt management plans and programs (DMP), which can also sometimes be called credit counseling, is part of a rapidly growing industry. There are many companies and organizations who are now offering debt relief services and advice to consumers. You do need to be knowledgeable and have information about what to be on the lookout for, and also the benefits that you can expect from a debt management plan.

Debt management plan implications

1. Your credit rating may drop. Your scores may go down. It is not a definite and you are not guaranteed to see lower credit scores. For example, if you have several late payments on your records or if you are significantly behind on any credit payments or paying any bills, then the chances are that debt management plans may actually improve your credit ratings.

On the other hand, if you currently have a large amount of outstanding debt but if you are current on your monthly payments, in this case your credit score may actually go down when you enroll in a debt management plan. This is because as your debt management company renegotiates your credit obligations, the company may need to change when your monthly payments are made to creditors, which then may potentially result in late payments being reported on your credit history and which would lower your credit scores. In addition, some creditors may decide to close your accounts while you are in a debt management program, and if you had good history with those accounts, those records will be taken off your credit history.

However, you need to think about the long term. Taking the action of enrolling in a debt management program is a long term decision, and you need to gather all the facts and information on them regardless of whether your credit score goes up or down in the short term. The bottom line is that repay your debts is the best thing for your credit score over the long term. Doing this is defiantly better than continuing to be late on your payments or not paying your bills at all.

 

 

 

2. Consider both for profit and non-profit companies – Some debt management companies try to sell you on the fact they are non-profit. They may very well be organized as a nonprofit business, however the truth is that these companies are still in business to make money. The only difference is that they distribute their earnings differently than a for-profit corporation, but they still need to earn money from you. All companies, whether profit or non-profit, will charge you for their services, however it is usually as a modest monthly fee. But shop around for the best deals and service.

3. You will need to give up new credit – These plans will stop you from opening new lines of credit or getting new credit cards. If you even try to do this, you will risk any of the benefits your debt management company and program has negotiated for you. So before you enroll, make sure you do not anticipate needing any new credit in the near future, such as an auto loan.

4. The DMP does not take immediate effect - After you make the decision, apply, and then enroll into a debt management program, it may take a month or two before your creditors receive their first payment from the process. So a couple things to keep in mind.

There are ways to help avoid late payments on your credit rating. It is a great idea to make at least one month, or maybe even possibly two months, of “double payments” on your bills. So in effect you will be making one payment to the debt management service and then you will also make one regular payment directly to your creditors. However, this may be difficult to do giving your financial situation, so if you can’t do this, you need to be prepared for the possibility of getting a late mark or a reduction of your credit score.

Also note that you may get a collection calls from your creditors before they receive their first disbursement from the debt management agency as the program takes time to get underway. While the debt management company can’t prevent collection calls, most collectors tend to be satisfied when you tell them you have enrolled in a DMP and they will usually cease their calls and leave you alone once you inform them of the plan.

 

 

5. Initiate your own debt management program - Rather than contract with a company to provide you with this service, you may be able to contact your creditors and in effect start your own plan. You can explore credit card hardship programs, and learn tips to negotiate with your creditors.

Benefits of a debt management plan

6. Charges and fees will be waived – Most DMP companies will be able to get your creditors to eliminate both any charges as well as future late fees that might be incurred as creditors adjust your payment schedule or also eliminate any charges you currently have on your account, potentially saving you as much as $40 per creditor each month which is what some people pay for fees.

7. Your monthly interest rates will be reduced – After your debt management company proceeds to make contact and negotiate with your creditors, the vast majority of creditors will immediately lower your monthly interest rate, and some of them will lower it by several points. There are cases of people going from 20% down to rates between 12% and 16%. This is a huge help and savings if you are paying a high interest rate. These lower APRs can save you thousands of dollars in interest expense.

8. You can avoid bankruptcy – Nobody really ever wants to declare bankruptcy. A debt management plan people with a strong alternative to becoming legally destitute and filing bankruptcy. That being said, it is interesting in that in debt management or a credit counseling program is a prerequisite to filing bankruptcy and the courts will demand this. So if you try a DMP, but still find yourself unable to keep up with your monthly bills, bankruptcy is still an option. You do not lose the ability to file for it.

9. Simplify your bills as you will have only one monthly payment – A quick and simple benefit of a debt management program is you will have the ability to consolidate your various debt payments into just one quick and easy to male monthly payment.