Pros and cons of debt management plans
A debt management plan is not for everyone - there are pros and cons. While everyone’s circumstances differ, many consumers what to know the various options they have with a DMP. Some borrowers find them complicated or they are not sure whether they should enroll into one. Learn what the pros and cons of a debt management plan are.
Some of the main benefits include all creditors are addressed and there is no reduction in credit scores. Also fees and interest rate reductions are provided and the total paid, over time, is generally less with a DMP than paying each creditor one by one. Maybe the biggest disadvantaged to a debt management plan is the discipline that is required - in effect the borrower needs to adhere to all the payment terms, dates and amount due. Which low-income or struggling families on a budget may find risky - hard to do. Read how to start a DMP.
Pros of a debt management plan
One of the pros of debt management companies is that many will try to eliminate or reduce the amount of debt that you owe to all of the creditors, not just one or two. A DMP will help pay auto or student loans, medical bills, credit card companies and more. This huge advantage means your principal, or a significant part of what is owned to anyone, can be eliminated.
- They can lower a consumers monthly debt payments and reduce their interest rates.
- Many fees and charges, such as late fees and over limit costs, are waived off.
- Once the process has started, it will stop any harassing phone calls from your creditors, lenders and debt collectors. Learn more on how to stop collection calls.
- You will be required to make only a single monthly payment to pay all your bills.
Charges and fees will be waived from a DMP. Most debt management plans and companies that run them 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. Whether a late fee, overdraft charges or something else, those costs can be eliminated. This total cost savings what some people pay for the fees, so in effect using a DMP is free.
Debt management plans will often reduce your monthly interest rates. The vast majority of creditors, banks, loan companies you owe money too will immediately lower your monthly interest rate. The exact reduction will depend on where the consumer started as far as their interest rate and the information that is provided to the creditor. This is a huge advantage to a DMP and potential savings if you are paying a high interest rate.
You can avoid bankruptcy. Nobody really ever wants to declare bankruptcy. A pro to a debt management plan is that is provides people with a strong alternative to filing Chapter 11 or 13. While even a successful DMP may still require this, the chances of it occurring are much lower.
That being said, in most jurisdictions are debt management plan or use of 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, an advantage it that bankruptcy is still an option. You do not lose the ability to file for it.
An advantage of a DMP is it will simplify your bills. This is due to the fact you will have only one monthly payment to make each month to one company instead of needing to manage multiple accounts. A quick and simple pro of a debt management program is you will have the ability to consolidate your various payments. These means that all of the consumer’s loans, credit card accounts, and other sources of borrowing will now be covered by just one quick and easy to make monthly payment.
After an account you have that needs attention is placed into a debt management plan, any collection calls should stop within a month or two once payments begin to your creditors. This is obviously a major pro as it can tremendously reduce the stress of the borrower.
There is no reduction to your credit scores. When you are using a debt management plan, your credit report will indicate that you are making payments through a credit counseling agency or some other provider. Due to this advantage, the credit reporting agencies will not lower a credit score from these plans. If you enroll in a debt management plan, a major pros is will not impact your FICO score or credit ratings.
The bottom line is that a debt management program will help you recover from problems that are the result of credit card debt, medical expenses, loans, and more. You just need to keep making payments and stay on track with the plan. While it doesn’t happen overnight, eventually individuals will be debt free from these programs and their credit scores will be improved.
Debt management plan cons
You will need to give up new credit. These plans will stop you from opening new lines of borrowing or getting new credit cards, which in some ways is a pro but some families may consider that a disadvantage. If you even try to open a new account, you will risk any of the benefits your debt management company. Therefore before you enroll with a non-profit or other provider, make sure you do not anticipate needing any new forms of borrowing money in the near future, such as an auto loan.
The DMP does not always 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, and that delay can be a risk for people who are behind on their bills. So a couple things to keep in mind.
- There are ways to help avoid late payments that could fall 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 before starting the DMP process, however the credit counseling organization should provide details on that. 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 be aware that you may get a collection call from your creditors before the debt management plan starts up. While not a major pro, it is a fact to be mindful of. As the call will come from a creditor before they receive their first disbursement from the debt management agency as the program takes time to get underway.
- While unfortunately a disadvantage is that the company that you select as part of this process can’t prevent collection calls, most collectors tend to be satisfied when you tell them you have enrolled in a DMP. They will usually cease their calls and leave you alone once you inform them of the plan.
Conclusion - DMP have advantages and disadvantages
Any individual, or family, that needs help getting out of debt needs to make some difficult decisions on spending, lifestyle, income and more. All options, including a debt management plan, has both pros and cons. As noted, there are credit counselors that can help people navigate this process.
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