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What is a Debt Management Plan?
If you’re having trouble paying your credit card bills every month, a debt management plan from a nonprofit credit counselling agency might be the help you need.
The plan lumps your various credit card payments into a single payment, can cut your interest rates in half, and gives you a structured path to pay off the debt over three to five years.
Because you repay your original debt, debt plan management has much less effect on your credit score than debt settlement or bankruptcy.
How does a debt management plan work?
A debt management plan (DMP) is an agreement between you and your creditors to help you pay off your debt.
A DMP is usually set up and managed by a third-party provider, for example, a debt charity or debt management company.
Before setting up your plan, your DMP provider will help you put together a budget, This will show how much you can afford to pay your debts after all your priority payments and living expenses have been covered.
If there’s any money left over after your living costs are covered, you’ll share this out fairly between your creditors. Usually, you’ll make a monthly payment to your DMP provider and they’ll pass on the correct payments to your creditors.
Which debts can I pay off with a Debt Management Plan?
You can only use a DMP for non-priority debts.
- personal loans
- bank or building society loans
- money borrowed from friends or family
- credit card, store card debts or payday loans
- catalogue, home credit or in-store credit debts.
Where can I get debt advice?
Debt management plans are offered by credit counselling agencies. If you’re thinking of going this route find a credit counsellor to go over your financial situation thoroughly and discuss several options, not just a debt management plan. Don’t feel pressured to sign up the same day any program is offered. Take time to think about it.
Unsecured debts, such as credit cards and personal loans. Secured debts — such as those for houses and cars — aren’t covered. Nor are student loans.
The counsellor will contact each creditor to notify it of the debt management plan and make itself the payer on your account. The counsellor may seek concessions from each creditor, which can include lower interest rates, lower monthly payments or “re-ageing” an account to stop late fees.
Each month, your payment will go electronically to the counselling agency, which then pays your creditors. You get a progress report each month.
You’ll likely pay an enrollment fee as well as a monthly fee for each credit account in the plan. (Even with those, your overall monthly payment should be lower.)
What to expect while on the plan
Be prepared to live without credit cards for as long as you’re in the program. Most credit card issuers will require that an account entering a debt management plan be closed. You may be allowed to keep a card for emergencies or business, though; ask before you sign up.
Also, avoid any new credit obligations for the duration of the plan. Your creditors will see any new obligations on your credit report, and they may withdraw their concessions.
You should strive to make the payments on time, every time. Creditors have given you some major concessions, and they tend to insist on you meeting their terms. One missed payment and they may be done with waiving fees and charging less interest.
When debt management plans work best
If you’re struggling with revolving debt, the upsides are:
- A single, lower payment.
- No more (or at least fewer) phone calls from creditors or collectors.
- The ability to finally put debt behind you.
It’s probably not right for you if:
- You are having trouble paying secured debts, such as a mortgage or car payment.
- Your income barely covers necessities, such as food and utilities.
- You want to continue to use your credit cards.
Having to live without credit cards or new credit might be an advantage if you worry about controlling spending.
Because you have to commit to many months of payments, you’ll want to make sure there is room in your budget to do so. Over the years you’re paying the plan, unexpected expenses will crop up, so access to some kind of emergency fund is crucial.
It’s even possible that financial coaching, by itself, is all you need to catch up. If you decide a debt management plan is right for you, it’s smart to get help with budgeting and money management to prevent you from falling behind again.
Is debt management the right option for you?
- Debt consolidation loans, although terms and qualifying depend on your credit score.
- Bankruptcy, which can be the best option when your debt is overwhelming.
- Debt settlement, although there are significant downsides that make it a last resort.
Benefits of a DMP
- If your DMP is free all the money you pay into it will go towards paying off your debts
- There’s only one monthly payment and this should be set at an amount that’s realistically affordable for you
- You’re not tied into the agreement, so you can leave the DMP agreement if you want to
- DMPs are flexible, so they can be adapted to suit your situation if your income or living costs change
Risks with a DMP
- It’ll take longer to repay your debts as you’ll be making reduced payments
- Interest or charges may not stop on a DMP and could be added to your debt, making the total you repay higher
- Making reduced payments on a DMP will affect your credit rating, even if your creditors are happy to accept the DMP
- Your creditors could still take further action, for example passing your debt to a collection agency or starting court action
How can a debt adviser help?
- Treat everything you say in confidence
- Never judge you or make you feel bad about your situation
- Suggest ways of dealing with debts that you might not know about
- Check you have applied for all the benefits and entitlements available to you
- Always make sure you are comfortable with your decision.