One piece of debt-related advice you may have heard is to meet with a credit counselor. These certified professionals could help you go over your financial situation with a fine-toothed comb to come up with potential solutions. You may even find you’re eligible to enroll in a debt management plan (DMP) through the credit counseling agency, which is one possible strategy for eliminating debt.
When someone enrolls in a DMP they make a single monthly payment to the credit-counseling agency rather than directly to creditors. The agency then disperses the funds on the client’s behalf. The credit counselor also works to negotiate more favorable interest rates and fee reductions because you’re enrolled in a DMP. If all goes well, the process typically takes three to five years to clear your debts.
Your next question may be, “Are there any drawbacks to debt management?” As with any debt relief strategy, there are pros and cons to consider before committing to a certain solution.
Not All DMPs are Reputable
It’s important to be certain you’re enrolling in a DMP with a track record of helping consumers. In some unfortunate cases, people have made payments to an agency — only to find out it was keeping those funds, rather than passing them along to creditors. This, of course, left those unfortunate souls in a worse situation than before they started.
Debt experts at the credit reporting concern Experian recommend continuing to make payments on your own until you receive written confirmation of an approval of your DMP from your creditors. It’s also important to review your monthly statements promptly to ensure payment from the agency went through on time — and in the proper amount, counting any adjusted interest rates or waived fees.
You’ll Pay Fees to Enroll in a DMP
It typically costs money to enroll in a debt management program. Some agencies charge a one-time enrollment fee to join up front. Most will require enrollees to pay a monthly maintenance fee along the lines of $25 to $35. It’s important to weigh these costs versus the potential benefits before signing up. If you’re getting a decent break on interest rates or fees, the monthly expense of a DMP may be more than reasonable.
You’ll Pay Your Balances in Full
Some strategies, like debt settlement, offer consumers the chance to zero out their debts for less than the original amount owed. DMPs require payment in full over the course of years. People with a lot of unsecured debt may require a more aggressive option like settlement or bankruptcy.
You’ll Have to Stop Using Credit
As NerdWallet notes, you can expect to live without credit cards for the duration of your time in a DMP. Most creditors require you close credit accounts while participating. If you do take on new credit obligations while participating in a DMP, creditors may withdraw their concessions — like reduced interest and fees.
It’s important to make sure you’re able to commit to this credit-free life until your current unsecured debts are paid off through the DMP. There’s really no way to “cheat” or get around this stipulation, as creditors will see your activity on your credit report. You may need to drastically reconfigure your spending habits in the meantime.
You’re Responsible for Consistent Payments
As we mentioned above, DMPs often take three to five years. This means you’re committing to monthly payments for the duration. Of course, given none of us can see the future — you may find yourself facing an expensive medical situation or loss of income while you’re enrolled in a DMP. Unfortunately, if you falter on payments, you’ll likely be set back to square one, without the DMP.
Are there any drawbacks to debt management? Yes, like any debt relief option, there are potential benefits and challenges to weigh before moving ahead with the plan.