Too much debt can feel like a heavy weight holding you back in life. But often it is an obstacle that can be overcome.
Whether you have high interest accounts or just too much debt, a debt management plan can be a great option for you if you are having trouble paying back.
Can you plan your way out of debt? In a word, yes. In fact, planning is one of the most important ingredients to successful debt settlement.
“If you really want to get out of debt, the easiest thing to do is to put a plan or strategy behind it. It’s one thing to just say you don’t want to be in debt, but having an approach to it will get you there, ”said Tim Steffen, senior consultant in the Advisor Education Group at PIMCO, an investment management firm headquartered in California.
What is a Debt Management Plan?
A debt management plan is a method of paying off debt that involves consolidating multiple lines of debt into a single repayment plan.
This is usually done with the help of a non-profit credit counseling agency, but you can also do this yourself.
Debt management plans don’t work for every type of debt. They’re typically used to pay off unsecured debts such as credit cards, medical bills, utility bills, or most personal loans. Secured debt – that is, debts associated with something that can be taken away, such as a house or a car – is usually unsecured. Federal student loans are also typically removed from debt plans because the lender is the government and can pawn wages to make up for non-payments.
Is A Debt Management Plan Right For You?
When you’re struggling to pay off your debt, a debt management plan can make you feel hopeful.
“When we ask customers about their goals, sometimes they don’t even have a way to get out of debt. It’s definitely possible, ”said Katie Bossler, quality assurance specialist at GreenPath Financial Wellness, a nonprofit credit counseling agency with offices across the country.
If you choose to do this work through a credit counseling agency, you will first work with an advisor to discuss and review your financial situation so that you can better understand your debt relief options. As a rule, an initial consultation at a credit counseling center is free of charge. Sometimes an advisor can recommend alternatives, such as bankruptcy or a credit card with a credit transfer. It depends on how serious your situation is.
If a debt management plan makes sense to you, the advisor can negotiate with your creditors to waive fees and lower the interest on your accounts. The counselor will create a schedule to give you an idea of when your debt will be able to be paid back in full. A debt management plan usually lasts between three and five years.
The agency may charge you upfront and monthly fees for their service, but the interest you save may outweigh the fees.
If you are considering signing up for a debt management plan, consider partnering with a nonprofit agency accredited by the National Foundation for Credit Counseling or the Financial Counseling Association of America.
Many scam companies offer debt management plans, so make sure you check them out properly before signing up. You can do this by making a list of advisory agencies you might want to work with and checking each with your attorney general and local consumer protection agency to see if there have been any complaints according to the Federal Trade Commission.
Benefits of a debt management plan
There are many benefits to pursuing a debt management plan. If you’re feeling overwhelmed or making monthly payments and your balance never seems to go down, this is an option you should consider.
Here are the advantages:
During your first meeting, a counselor will go through your finances and determine the best course of action to pay off your debt. They discuss your budget, debt, goals, and debt settlement options. This can give you a better view of your overall financial picture, even if you don’t sign up for the plan.
Pay off debts earlier
There will likely be fee waivers and lower payments with a debt management plan. Your advisor will negotiate with your creditors on your behalf and provide them with your specific repayment plan. Sometimes you even get a lower interest rate. With smaller payments, a larger part of your payment can go towards the main balance instead of interest. As part of the plan, if you’ve defaulted on payments, your accounts will be updated. You will receive a monthly invoice which you will pay to the counseling center, which will distribute your payments to your creditors for you. That way, you don’t have to juggle multiple bills with different creditors.
You can easily spend years making minimal payments on your debt with little to no progress on paying off due to interest. With a debt management plan, you have an effective strategy and an advisor to keep you motivated.
Disadvantages of a debt management plan
Everything has its pros and cons, and debt management plans are no exception. While debt management plans can be beneficial in many ways, you should be aware of their drawbacks in order to determine if it is the right option for you. After your initial interview, you may feel pressured to register. Take the time to think about it.
Here are the downsides:
Impact on creditworthiness
Your creditworthiness could take a hit in the first few months of the program as you may have to close some accounts, which will adversely affect your credit life. But it has a lot less impact on your credit score than debt settlement or bankruptcy.
According to Bossler, a credit counseling agency will charge you an initial upfront fee ($ 30 to $ 50) and a monthly fee ($ 25 to $ 75) for participating in a debt management plan. The fees vary depending on the credit counseling agency. Sometimes you can qualify for housing or exemptions depending on your financial situation.
Not all debts are included
Debt management plans do not include secured debt such as student loans, auto payments, or mortgages. A counselor can advise you on how to deal with this debt. If the majority of your debt is secured, debt management advice may not be right for you.
First, use discipline and permanent behavioral changes to try to settle your debts on your own. However, if you need someone to hold you accountable or you are just too heavily in debt, your next step should be a free initial interview with a credit counseling agency to discuss your options.
The Do-It-Yourself Approach
You may feel that the disadvantages outweigh the advantages when it comes to debt management plans. In this case, you always have the option of holding yourself accountable and trying to pay off your debts without professional help. There are many tools, budgeting apps, and debt settlement strategies (snowball, avalanche, or landslide) to get you started. And if that doesn’t work, consider a debt management plan with a nonprofit credit counseling agency.
Even if you are planning to take on this debt yourself, it can be helpful to have a one-time free consultation with a credit counselor.
How do you know if self-help or debt management works best for you? It depends on your debt level and your discipline. Regardless, you need to change the behaviors that have caused you to be permanently indebted. “If you can find out how and why you got into debt, that’s half the battle,” says Bossler.
As with a credit reporting agency, you can budget, contact creditors, and try to work out a modified payment plan to reduce your payments to a manageable level. Steffen says you can do almost anything a credit counseling agency can do about managing and paying off debt – including calling your issuer to negotiate lower payments – but with a few caveats.
For example, you have no one to hold you accountable and agencies may have more bargaining power in negotiating lower payments and interest rates.
“But here, too, they don’t do anything that an individual cannot do alone,” says Steffen. “There’s no reason a person can’t call and negotiate with a lender to get better terms.”
Debt Management in Times of COVID-19
For those managing debt during this time of COVID, it may be helpful to work with a credit or financial advisor to figure out the best debt strategy for you.
There was a lot of conflicting personal financial advice going on during the coronavirus pandemic. Some experts recommend that saving should be given priority over debt payments during the pandemic, while others say it is important to go “business as usual” and pay your bills so you don’t get further behind schedule.
In general, if you don’t already have some kind of rainy day fund in place, it’s a smart idea to prioritize home savings before investing extra cash on your debt. If you already have solid emergency reserves, now may be a good time to settle your debts a little faster.
But everyone’s financial life is different. The financial advice you will follow during this time will depend on a variety of personal information. Talking to a financial or credit advisor can give you relief and stability.
Many COVID-19 financial assistance programs are nearing their expiration date with the option of renewal. Lenders will have to decide whether or not to keep deferring the debt. If you have forbearance or a suspension of payment arrangement, it is important to check in with your creditors and lenders to get a better feel for what options may be available in the coming weeks.