Do you feel like your debt is taking over your life? What you need is a strategy for debt management. With the help of this debt payback method, you will be able to eliminate your debts, generally from credit cards, within three to five years. A debt management plan (DMP) combines many outstanding obligations into a manageable monthly payment and negotiates reduced interest rates with your creditors. In return, you are obligated to participate in a payment plan that typically spans three to five years. Note that interest rate reductions are uniform across all credit counseling companies and are determined by the parameters set out by your creditors and your financial plan.
Types of Debt Management Plans
For-profit
A DMP that generates profits for its owners is managed by a company that keeps an eye on the bottom line, as the name of this kind of program suggests. Even though they provide the same services as non-profit credit counseling firms that also provide debt management plans, the costs associated with their services may be much higher.
April Lewis Parks says that "for-profit organizations could have good counselors, but they certainly provide many additional services that they might push on their customers – whether they're useful or not." She argues that for-profit organizations "may have wonderful counselors," but customers may feel pressured to engage in "many other services" offered by the organization. "It's the same as an investment business tries to guide you into funds that earn them high fees but deliver you lousy results," you may comment about this.
You should also be wary of DMP firms that operate for profit and advertise a speedy solution. If you sign up for a debt management program, it will typically take three to five years to repay your outstanding debts. If an agency sets impossible standards, you should be wary about working with them.
Non-profit
According to the FTC, the most reliable data management programs come from non-profit organizations. Also, if you are in a difficult financial condition, a lot of organizations provide credit counseling that could give their services at no cost or at a very low fee. In addition, they provide educational materials and other services or resources that assist you in improving your financial situation and managing your budget more effectively.
The Federal Trade Commission warns consumers that just because an organization is non-profit doesn't always indicate that its services are reputable, affordable, or free of charge. Some non-profit organizations may try to disguise their exorbitant costs or urge you to make "voluntary" donations when, in reality, they're only adding to the amount of debt you already have.
Pros
- You can reduce the amount of interest you pay by at least half.
- It helps pay off debt more quickly than if the individual did it.
- Combines many obligations into a single monthly payment.
Cons
- Mostly for debt on credit cards; it cannot be used for educational loans, debt to medical providers, or responsibilities to the government.
- It may take anywhere from three to five years, and when you're on the plan, you won't be allowed to use credit cards or open new lines of credit.
- The strategy might be derailed, and your interest rate decreases can stop if you miss a payment.
Is A Debt Management Plan Right For You?
DMPs are only for some. Depending on the organization, only 10% to 20% of consumers wind up using this particular option for debt relief. Depending on the year and how the agency records completions, around fifty percent to seventy percent of those who complete the plan. If any of the following apply to your situation:
- The proportion of your yearly income taken up by unsecured debt, such as credit card debt, ranges from 15% to 39%.
- You have a consistent income and believe you would be able to pay off your debt in less than five years if its interest rate were lower.
- You won't need to establish additional lines of credit to make it through the plan.
Alternatives to a Debt Management Plan
Debt management programs (DMPs) are only sometimes the most effective method for reducing debt. In most cases, such plans would not cover problematic debt such as that incurred from school loans or medical expenditures. Alternate possibilities:
- If your debt is less than 15% of your yearly income, you can tackle it using a strategy like the debt avalanche or the debt snowball.
- If you have excellent enough credit to qualify, a debt consolidation loan may help you combine many bills into a single loan with a reduced interest rate. You are in complete control of the length of time that the loan is for, and you will retain the opportunity to establish additional credit lines.
