Managing credit card debt along with other bills on monthly income that is not adequate enough often creates a financial hardship for many people. Non-profit credit counseling agencies offer free or low cost Debt Management Plans, or DMPs, that can assist you with getting back on track . The programs not only help pay all sorts of financial obligations, including credit card or medical debt, personal loans, and other bills, but the credit union DMP plans can also assist the client with rebuilding their credit scores over time. Learn more on, and the details, of what debt management plans are below. If is often the case that obtaining the basic necessities of food, healthcare and shelter often takes priority over making regular bill payments on time. When the debts build up over time, and you think you have no “easy” or realistic way to pay them off, then what happens is credit scores plummet and declaring bankruptcy may seem to be the only solution. Entering into a formal debt management plan (DMP) can provide a valuable alternative to get you back on financial stability. It is often a free solution from local as well as national non-profit credit counseling organizations . As a result of a DMP, late fees and interest costs, as well as the principal on your debt, will all be addressed.
- debt management plan is often a much better alternative. As pursuing bankruptcy has consequences that some people find unacceptable and it can create another form of hardship. As bankruptcy is noted on credit reports for 10 years and it will also do signification damage to your credit ratings. In addition to that, many still believe bankruptcy carries a negative stigma while others simply feel they should remain responsible for paying their debts and just want a little help and guidance. In these circumstances, a debt management plan may be the answer.
How debt management plans work and what they are
Debt management plans are available in every state and are usually offered by accredited charitable or non-profit consumer counseling organizations. Some banks or private lenders may also offer them as part of their financial literacy and development programs. They can be one of the most effective debt-relief options available. The basics are fairly simple regardless of the agency you choose.
- certified financial counselor will conduct a thorough review of your debts and total household income. Eligible bills will be consolidated into a three to five-year plan that will ultimately result in paying off these obligations.
The counselor will work with each creditor involved in the plan to create alternative payment plans by reducing interest rates and eliminating late fees that may have been added to the debt. The counselor will also help build up the clients financial literacy knowledge, budgeting as well as money management skills. In many cases, interest rates can be reduced from mid to high teens to mid single digits. Some DMPs can lower rates that are higher than 25% to between 8 and 12% saving the client thousands of dollars. This results in more of your monthly payment going to pay down the principal debt thus helping to pay it off more quickly. You will no longer be responsible for directly paying creditors involved in the plan . Instead, you make one monthly payment to the debt management agency which, in turn, pays the creditors a negotiated amount. This is why you want to be sure the agency that is running the DMP is accredited, and ideally a non-profit approved by the Department of Justice. Your monthly payment is often set up as an automatic withdrawal on a specific date from your bank account. All you need to do is ensure the monthly payment amount is available in your account. In addition to making your monthly payment to the debt management agency, there are sometimes costs that must be paid for entering into a DMP . Most agencies charge a one-time enrollment fee of $35-45 followed by a monthly charge of between $20-30. This is a comparatively small cost compared to the interest charges that will be eliminated on managed debt. However qualified low income families or those in an “approved” financial hardship may be enrolled into a free debt management program from the agency.
What are benefits of DMP – debt management plans?
The general benefits include a significant cut in interest rates, elimination of late or over-limit fees, consolidation of debts into one payment, and you avoid bankruptcy but keep it as an option should you be unable to maintain the plan. All of those benefits will result in more of your monthly payment going to pay off the principal balance. That will in effect mean your debts, whether credit card, medical, payday loans, or anything else is paid off in less time. You receive continuous support and guidance to help you pay off debt faster than might be possible on your own. If you have strong self-discipline, all you may require from a plan is the professional help provided to reduce interest and waive fees plus someone to make the monthly payments to creditors. For those who might benefit from having more frequent encouragement and financial advice to prevent falling back into bad spending habits, a financial counselor’s support can prove valuable. Counselors often provide guidance on how to improve finances , reduce expenses and avoid accumulating more debt. The agency may also offer classes to help learn about budgeting, home purchase decisions and lifestyle changes that can reduce reliance on credit. They work with clients to improve their financial proficiency. Debt Management Plans can also reduce your financial stres
- As they cut back or even eliminate collection phone calls or letters. Undertaking a DMP will also eventually stop harassing phone calls, letters and other debt collection efforts once the creditor learns of the plan.
DMPs help clients with poor credit scores as well . In fact they can be a great option for those individuals, and maybe the only realistic solution they have. Unlike a debt consolidation loan that requires relatively good credit to obtain, you don’t need good credit to get into a DMP . In most cases, your credit score will not be great, and this is precisely one of the major reasons you need a management plan.
What are drawbacks of debt management programs?
Not all of your monthly bills may be eligible for consolidation into a DMP . Plans are primarily used to pay off credit card and other unsecured debt. This can often be medical too. DMP is for paying off debts that do not have collateral as a backup. Secured debt such as auto loans, mortgages, and home equity loans cannot be included in a DMP, and the monthly payments for those bills remain your responsibility to pay. The client will of course have other expenses they are responsible for, such as food, transportation, utilities and more along with the regular payment to the debt management agency. Similarly, student loans cannot be included in debt management plans. Medical bills are often allowed as part of a plan, but even if included, medical bills will not always get special treatment or reduction in interest rates. It depends on what the agency can negotiation, which is another reason to use a non-profit credit counseling agency for a DMP as they often have more success. In general, a big benefit of medical debts being included is you no longer have to worry about making a separate payment to the medical provider. Even though certain debts may not be included in the plan, your counselor can frequently direct you towards programs that may offer guidance and assistance to reduce or consolidate those obligations. DMPs take substantial time to complete , and during that period you cannot apply for new credit or use the credit cards being paid off by the plan. In limited circumstances, you may be allowed to use one credit card but only in case of an emergency. If you are planning to obtain a car or home loan after beginning a DMP, you will have to postpone those plans You must ensure your monthly payment is made to the debt management agency . Look for one with an automatic monthly payment system or some recurring system. As missing a payment can result in terminating the plan and a return to higher interest rates on outstanding debt.
How a DMP may affect your credit score
If you are considering a DMP, chances are your credit is poor and your score is low. Beginning a debt management plan will slowly but surely eventually improve your score , and, when completed, will leave you in a much-improved position to apply for credit. This increases your changes of buying a home, auto loan, or even getting a job. Credit scores are negatively impacted by having late or missed payments and by using a high percentage of available credit. Upon entering a DMP many creditors will close the affected accounts and payments may be recorded as late while the plan is getting underway. Consequently, your credit score may drop slightly for several months, but it should begin to rise soon after. Once the plan has been in effect for a few months, creditors will often shift accounts from delinquent to current status. This is of course a positive for you. Notes indicating you are involved in a DMP may be added to your credit report demonstrating an effort to responsibly address debt. Most importantly, as the plan proceeds you will be establishing a pattern of making payments on time, one of the most important factors for calculating credit scores. Even though the length of a DMP may seem like a difficult obstacle, repaying debt and establishing a positive payment history are the best ways to improve your credit score as well as financial health. As is taking advantage of the other free financial counseling as well as literacy programs that will be offered to you.
How to determine if a DMP is right for your situation and getting started
DMPs are not for everyone. While the majority of people entering into debt management plans successfully complete the programs, a significant number fail. For a program to succeed you need to have a steady source of income sufficient to pay off the reduced debt obligations within five years. You need to budget, spend wisely, limit your household expenses and ideally increase income . It other words, you need to do all the simple things to get back on track. You have to be able to manage without opening a new line of credit during this period. If you have too many different types of debt that cannot be consolidated into a DMP, then a credit counseling agency can offer other assistance too. They may be the best option for you. They will also try to help if your unsecured debt exceeds 40% of your annual income, you may be better off considering other options. Once you have settled on pursuing a debt management plan, the first step is to choose a certified credit counseling agency, ideally a non-profit . The National Foundation for Credit Counseling (phone number 800-888-2227), the Consumer Credit Counseling Services (phone 800-431-8157) and the Financial Counseling Association of America (phone – 866-278-1567) provide certification that requires agency counselors to meet a standard level of quality. There are many other local and national organizations out there as well, some non-profit and some that are for-profit. Discuss you’re your debts, income and spending habits thoroughly and honestly. Complete disclosure is required for the counselor to effectively create a plan and provide free or low cost practical advice.
Alternatives for tackling debt
There are many other possible solutions out there. Debt management plans, given their time to complete, costs and incomplete application to all debt, may not be the way to go for some people. Some people may use a DMP and even combine it with other financial assistance or literacy programs. As there are still alternatives that can have a positive impact on monthly debt. Do-It-Yourself . One of the stress-relieving benefits of debt management plans is that you let someone else contact creditors to negotiate interest reductions and fee waivers. Or you can call them yourself. However, nothing prevents you from attempting the same on your own. This avenue often works best if your unsecured debt is less than 15% of your annual income. As an alternative, you can try to reach an agreement with a creditor to settle an outstanding for a substantially reduced amount. If a creditor’s choice is between getting paid nothing which may be the end result from bankruptcy or the alternatives of cutting interest, waiving fees or substantially reducing the overall debt, the creditor has an incentive to work with you. Even after you negotiate on your own (or a third party), you can still later use a DMP.
Debt Consolidation Loans
. Obtaining a bank loan at a significantly lower interest rate than your current debt carries may be a solution. Or you can borrow from a different, non-traditional lender such as Peer to Peer, Gig economy lenders, and the like. You determine the length of the payback period, and you can continue to use your credit cards or obtain new credit while paying off the loan. However, a challenge with this option is that you generally need a decent credit score to get the loan. Note that a score does not need to be high for a debt management plan. What happens often in this case is because you are seeking the loan only because you are struggling financially, you may not qualify for a consolidation loan. Bankruptcy . The initial goal of considering a DMP was to, in part, avoid going this route, but in some cases, bankruptcy may be the best alternative. If your debt is greater than 40% of your annual income and paying it off within 5 years does not seem possible even with help, obtaining a fresh start through bankruptcy should be given serious consideration.
The end result of Debt Management Plans
The bottom line is that they are a powerful tool that help many people get back on track financially. Debt management plans require a commitment to succeed. You’ll need to improve budgeting skills and, perhaps, eliminate some things that might be considered luxuries. You will need to change your spending habits and/or increase you income, or follow other suggestions of the counselor that will help you get on a path of long term financial success. If you have discipline and patience, a DMP can be an excellent option to avoid bankruptcy, improve your credit score and regain control of your finances. Debt management plans will help you pay down your bills and other financial obligations of all kinds, ranging from medical to healthcare Along the way, you will also develop better spending and budgeting habits as well as financial literacy skills that will help to prevent debt from ever again becoming an unmanageable burden. Debt Management Plans (DMPs) are great for low-income households and people who live paycheck to paycheck (which is most Americans). Our main website of needhelppayingbills.com has many other versions listed, including from major banks or lenders. Learn more on debt management plans for low-income families. By
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