What Is a Debt Management Plan?

What Is a Debt Management Plan?

Taking on debt to pay for the things we need is very common. Swiping a credit card at a store is simple, easy, and more convenient than carrying cash. Unfortunately, because charging things is so easy, many people end up with too much debt.

If you’ve taken on more debt than you can handle, a debt management plan can help you gain control of the situation. Before you sign up for one, it’s important to understand how they work so you can know whether it will be the best solution for your situation.

The Problem With Having Too Much Debt

Having too much debt isn’t just an inconvenience—it can cause serious problems in your life. A debt management plan may help you resolve or avoid these issues.

It Could Harm Your Credit Score

Having too much debt could result in missed payments, which will harm your credit score. Having a good credit score isn’t just important for obtaining loans. It may also be checked when you:

  • Apply for a job
  • Obtain utilities
  • Rent an apartment
  • Buy car insurance
  • Obtain cell phone service 

Because of this, maintaining a good score at all times is important to avoid running into problems.

You May Not Qualify for a Loan

If you have too much debt, it could cause you to be denied a student loan, home mortgage, or another type of loan that you need. A lender may consider you to be a high risk for default if you have a lot of debt.

It Could Result In a Bankruptcy

Many people throw in the towel on their debt and declare bankruptcy. A bankruptcy will stay on your credit report for several years and make borrowing difficult until it is removed. 

What Is a Debt Management Plan?

To get control of debt, an important tool that many people turn to for help is a debt management plan. When followed, it can help you eliminate your unsecured debts within three to five years.

A debt management plan is a strategy for paying off your unsecured debts if you choose not to use a debt consolidation loan or declare bankruptcy. It’s important to point out that these plans only help you pay off your unsecured debts, like credit cards. They can’t be used to repay your mortgage, car loan, and other debts.

Debt management plans are offered by non-profit credit counseling agencies. You can check the websites of the National Foundation for Credit Counseling or the U.S. Department of Justice to find lists of credit counseling agencies. 

Another option is to use San Francisco Federal Credit Union’s partner, BALANCE, a non-profit credit counseling agency that has helped many people over the years get control of their finances and pay off their unsecured debts. 

Balance is accredited, submits to voluntary audits, and all of its counselors are certified. This means you will be working with a professional organization that is committed to helping every person they work with meet their financial goals. 

How Do Debt Management Plans Work?

When you participate in a debt management plan, a credit counselor will work closely with you to develop a customized plan for your unique financial situation. Your counselor will also negotiate with your creditors to see if they will decrease your payments, lower your interest rates, or waive late fees.

Debt repayment is simplified with a debt management plan. You will make one payment to the agency each month to cover all of your unsecured debts. The agency then distributes your payments for you. This helps the agency ensure that you are staying on track.

In addition to helping you reduce or eliminate your current unsecured debts, your credit counselor may also work with you to develop better money management skills. This could include advice on creating a budget and lowering your expenses.

A modest fee may be required to participate in a debt management plan. This fee may pay for itself, however, with the savings from the lowered payments, waived late fees, and the money management skills you’ll develop.

As a condition of working with you, your credit counseling agency will require that you not acquire any new credit lines during this time. They will also require you to close your current credit card accounts.

Why Should You Use a Debt Management Plan?

Debt management plans have several important benefits to consider. Working with a debt counselor can take a lot of the guesswork out of the negotiation process. You may also develop new financial skills to help you manage your money better in the future.

1. You’ll Be Better Organized

Because you only make one payment each month to your credit counseling agency, keeping up with your bills will be much easier. The agency takes care of disbursing the payments for you so all of your payments are made on time.

2. It Gives You a Goal to Work Towards

Many people often feel like they are drowning in debt. The idea of breaking free may seem like an impossible dream when you try to do it alone. Your counselor will develop a plan to get you out of debt within three to five years as long as you make timely payments to your credit counseling agency. 

3. Your Credit Score May Improve

If debt overload has caused you to miss a few payments, a debt management plan can help you make all of your payments on time as you work to eliminate the debt. This may help to improve your credit score. It will also help you save money on late fees.

4. You’ll Get Professional Financial Advice

The financial advice you’ll receive while participating in a debt management plan can help you manage your money better in the future.

5. You’ll Eliminate Your Unsecured Debts

If you complete a debt management plan, you will completely pay off all of your unsecured debts. 

Is a Debt Management Plan Right for You?

Although a debt management plan is a great way to get control of your finances, it may not be right for everyone.

One of the requirements to participate in a debt management plan, for example, is that you have to close all of your current credit card accounts. This could cause problems if you have to book an airline flight, reserve a rental car or hotel room, or buy something online.

Click below to learn more about the pros and cons of debt management plans. It will help you decide whether it’s a good option for you.

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