Debt Management Plans (DMP’s) are agreements made between creditors and debtors via a third-party debt management company. These agreements help you in paying your debts at a rate that you can afford with ease. Companies that offer Debt Management Plans usually involve helping you in paying out your non-priority debts such as:
- small medical debts;
- collection debts;
- bank or building society loans;
- money lend by friends and family;
- payday loans;
- over drafts etc.
The companies that arrange these are called Debt management companies or credit counseling companies.
In general, by agreeing to a DMP your creditors allow you to pay back your dues in small monthly installments over a longer period of time. This helps if you are able to spare only a small amount towards the repayment of your debts. Sometimes through a legitimate and trusted DMP provider creditors remove interests on your current debts although it is not always assured.
How does a DMP work?
A DMP typically works in the following way:
- After enlisting the help of a licensed debt management company you’ll be depositing the amount agreed upon between you and the DMP provider into an account.
- The credit counseling agency utilizes this money to pay your creditors.
- This goes on for a period of 36-60 months during which you are supposed to keep depositing the amount in the account without fail. In addition to the money for the creditors, you are required to pay a fee to the debt management company for their services. While it is not much in most companies, some charge exorbitant fees. Fortunately, this can be waived if a person has a low income.
Debt Management Plan Pros and Cons
Utilizing a DMP to reduce your interests and pay of your debts may excite you but it’s better to know all about the settlement and its various pros and cons before committing to one.
Ultimately the choice of reaching for a DMP provider will depend on your financial situation. Below we have listed some of the numerous pros and cons of a Debt Management Plan:
Pros of Debt Management Plans
One Payment Each Month
With a Debt Management Plan, you would only be required to pay your designated amount once a month to your credit counseling agency. The credit counseling agency would pay the amount to your creditors each month. This helps those individuals who are struggling with multiple debts and can’t pay each of them every month.
Reduction in Stress and Creditor Harassment
The upside of making one monthly payment to the DMP provider means no more complex payment calendar and no more stress of late payment fees. In addition to this, if your debit-card company or creditor accepts your DMP proposal you can expect significant reduction in collection calls which contribute a major source of stress for the borrower
Small Monthly Payments
The main advantage of a Debt Management Plan is reduction in your monthly payments to your credit card companies. This reduction will help you in taking care of your necessities and in the long run will help you avoid taking more credit card loans to take care of the basic amenities of your life.
Lower Interest Rates
Although this is not guaranteed to happen, your credit counselor will undoubtedly try to get the interest on your debts to be reduced. High interest rates can result in accumulation of more debt with the result being the increment in monthly payments.
Lower interest rates on the other hand can reduce your monthly payments. Some creditors may even freeze interests and late fees on your debts although it is not guaranteed.
Faster payments of debts
Smaller monthly payments coupled with reduced interest rates can lead to you paying off your debts with ease. Most debt management plans are for the terms of 3 to 5 years, but with lower interest rates you can pay off your debts even faster. Moreover, DMP’s ensure that all your dues are cleared in full at the end of agreement.
Using a good debt management program give access to professional counseling for example, financial counseling, budget counseling and information on how to get out of debt. The counselors talk with you to find out the maximum amount you can spare and even draw up a budget plan which you should follow in order to gain the maximum benefits from the agreement.
Cons of Debt Management Plans
Just as there are several advantages of a debt management program, there are quite a few disadvantages as well:
Since a debt management program is considered an informal agreement between you and your creditors, they are legally bounded to cease all contact with you and are under no obligation to freeze interest rates and late fees on your debts. Since they are not legally bounded, they can stop the plan any time they want without any repercussions.
Possibility of Rejection
While credit counselors try their best to draw up an agreement that is beneficial for you, some of your creditors may not accept a DMP proposal. Due to its informal status, all of your creditors have to agree to the debt management plan for it to work.
Longer time required to pay off debts
While it is not guaranteed, a debt management plan can take longer than 5 years to fully pay your debts. This can result due to several reasons the key ones being:
- You are under a huge debt and have low income;
- Your creditor does not agree to freeze the interest and late fees on your dues;
- Your creditor agrees to reduce a small amount of interest and late fees on your dues.
The debt management companies typically try to pay off the smaller debts first while letting the bigger ones keep gathering interest which can result in the increase of time required to pay off your debts.
Close Credit Card Accounts
In order to make sure that you do not take on more debt you will be required to close those credit cards which are included in your DMP, while it is advised that you do not use any other credit cards that you might have for the duration of the agreement, except in dire situations.
Require Consistent Monthly Payments
While the benefits of a DMP are attractive, they come with a catch. You must make consistent monthly payments to your DMP Provider in order to continue availing the benefits.
Failure to pay the amount promptly may result in the termination of the benefits. Debt Management programs work best for those who can commit themselves to upholding their side of the bargain.
May prove to be more expensive than other solutions
This case arises when your creditors refuse to freeze interest and late fees on your debts which can contribute to the increase in the length of the plan. Furthermore, if you are arranging DMP through a non-government company, you will be expected to pay the administrative fees as well as your monthly fees which can prove to be a lot.
While pros and cons of a DMP can be kept on being listed, the decision to go for a DMP ultimately depends on your unique financial situation. Some people prefer making their own payment calendar and following it strictly to get out of debt. While a debt management program can get you out of debt, sometimes the cost is too much as compared to its other alternatives.
The most important thing to look out for when looking for a DMP provider are scammers. The customer should always verify that the company that they are signing up with is legitimate and should obtain all documents and agreements in written form to be on the safe side.