Debt Management Plan
Debt management plan summary:
If you work with a credit counseling agency, your counselor will help you create a debt management plan.
With a debt management plan, you’ll typically pay off debt over three to five years.
You make one monthly payment to the counseling agency and they distribute the money to your creditors.
Debt management plan definition and meaning
A debt management plan is a structured plan to pay off debt, typically over 3-5 years. Debt management plans don't reduce the amount you have to repay, but they could make repayment easier by streamlining monthly payments.
You set up a debt management plan with the help of a credit counselor. You make one payment to the counseling agency each month. The credit counselor then distributes the payment among the creditors you enroll with the plan. You are typically required to close your credit card accounts as a condition of enrollment. Your creditors could periodically check your credit reports to make sure.
More about debt management plans
A debt management plan is a debt payoff plan that's created with the help of a credit counselor. Debt management plans are designed to help people with unsecured debt, typically credit cards, repay what they owe over 3-5 years. These plans can streamline monthly payments, but they don't reduce the total amount you have to repay.
Key features of a debt management plan
Debt management plans offer a structured way to repay debt for people who may be struggling to manage multiple payments each month. The end goal of a debt management plan is to help you fully pay off all debts enrolled in the plan within a set time frame.
When you enroll, you agree to make one monthly payment to a credit counseling agency each month. The credit counselor then distributes that payment to your creditors. Your credit counselor may also negotiate with credit card companies to get them to lower your interest rate or waive certain fees.
Here are some key things to know about debt management plans.
You may need to have a minimum amount of debt to enroll in the plan.
Your creditors don't have to agree to the plan. If they do agree, and they could pull out if you don’t hold up your end of the agreement. That includes making all payments on time, and avoiding credit cards while you’re paying off your debt.
A debt management plan isn't a loan and you won't create new debt when you enroll.
You will probably be required to close your credit card accounts when you enroll.
The payment could be surprisingly high, especially if you’ve only been making minimum payments.
Debt management plans typically don't accept secured debts. A secured debt is attached to collateral or something of value. If you need help with these types of debts, you may need to seek a different solution.
Who is a debt management plan right for
A debt management plan could make more sense for some people than others. You might consider enrollment if you:
Mostly have unsecured debts, like credit cards
Need help with a workable repayment plan that fits your budget
Need help controlling credit card spending
Would like to reduce the number of debt payments you make each month
Are okay with closing your credit cards if asked to as a condition of enrollment
Can afford a payment big enough to fully repay all of your unsecured debt in 3-5 years
Debt Management Plan FAQs
What happens if I can't make my debt payments?
If you can't pay credit cards, student loans, or other debts on time, creditors or lenders can report late payments to the credit bureaus. Late payments usually have a negative impact on your credit profile. Eventually, debts might get sold to a collection agency.
It's a good idea to contact your creditors or have a conversation with a debt consultant if you think you're in danger of missing a payment. Creditors may offer financial hardship programs to give you temporary relief. A debt consultant could help you weigh other options to manage your debt.
What's the best way to create a debt payoff plan?
There's no right or wrong way to make a debt payoff plan. It depends on what debts you have, how much money you can save for debt repayment each month, and how long you want to pay off debt. For some people, the debt snowball method works best, while others prefer the debt avalanche.
Using a free budgeting app to analyze how much you can realistically afford to pay each month is a great place to start. You can compare your living expenses to your income to see what's left over that you could direct to debt.
How do you get rid of debt when you're broke?
If you have overwhelming debt and you can't afford a DIY payoff strategy, it may be time to bring in the experts. A debt expert can explain your options, including debt resolution or bankruptcy.
Debt resolution could help you get rid of debt for less than what you owe. Your credit standing might temporarily suffer, and there are fees to pay if you go with the pros. What you should expect in return is caring and helpful debt professionals who will help you get through your financial rough patch and an education about debt that stays with you for life.
Bankruptcy is a legal process for getting rid of certain debts. You might have to give up some things you own or give up all of your disposable income for several years. A serious debt solution could be the turning point you need to get on a path to a better financial future.
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