A life of debt can be tough to manage. You may struggle to make ends meet and juggle multiple loans and other financial commitments, and it can be hard to see a way out as you deal with growing balances. That’s why it’s crucial to manage your finances and keep your debts from getting out of hand.
To help with your financial difficulty, a debt management plan (DMP) is one of the best solutions available. A DMP outlines how you can repay your debts in terms you can afford, and it can also make it easier for you to manage your debts more effectively until you can pay them all off.
Read on to learn more about a debt management plan, why it’s essential, and how you can get one.
What Is a Debt Management Plan?
A debt management plan is an arrangement between you, your creditors, and your credit adviser to repay debts over some time. These plans are primarily facilitated through a nonprofit credit counseling organization. The plans are designed to help you manage your debt more effectively by allowing you a single payment each month instead of having multiple payments to different lenders. This can be extremely helpful if you have the financial burden of having various high-interest loans.
Working with a reliable credit counselor is crucial because they will look into your financial situation and find ways to make the payments more manageable. They can also negotiate with your lenders and help you get a lower interest rate or an extended repayment period.
Remember that a DMP doesn’t reduce the debt you owe or remove the interest from your loans. Instead, it helps make your monthly payments easier to manage by eliminating late fees and waiving additional charges. It also allows you to accrue less interest to focus on paying off your debt promptly and efficiently.
Debts You Can Include in a Debt Management Plan
A DMP is generally used to help manage unsecured debts, which are loans that don’t require collateral. It can be challenging to deal with all these different payments, so a DMP helps make it easier for you to eliminate your debt by streamlining the process.
Common unsecured loans that a DMP can help with include the following:
- Credit card debts
- Retail store card debts
- Medical bills
- Personal loans (aka Signature loans)
- Payday loan debts
- Collection accounts
- Overdue utility bills
- Old phone plan bills
- Repossession debts
- In some cases, overdue student loans, back taxes, and child support can also be included in a DMP. However, your credit counselor may not be able to negotiate lower interest rates for these types of debts.
Debts You Can’t Include in a Debt Management Plan
Some debts are not eligible for a DMP. These include secured debts backed by collateral that the creditor may take away if you fail to make payments or declare bankruptcy.
Secured debts include:
- Home mortgages
- Car loans
- Business loans
- Court fines
- Tax obligations
- Home equity loans and lines of credit (HELs and HELOCs)
- Pawn loans
- Title loans
- Current student loans
These debts must be repaid in full according to the agreed-upon terms and cannot be negotiated or modified through a DMP.
Why Do You Need a Debt Management Plan?
Enrolling in a DMP is an excellent way to get your debt under control. If you are drowning in debt and can’t keep up with your payments, a DMP may be the perfect solution. It can also help eliminate the stress of dealing with multiple creditors and payments and make it easier for you to stay on top of your finances.
Here are some of the other benefits of a DMP:
Pay Off Your Debt Steadily
There may be cases when you cannot make your monthly payment on time, which could lead to late fees and other charges. Additionally, it can be challenging to keep up with your payments and pay off the debt in the shortest amount of time because of soaring interest rates.
However, with a DMP, you only make one payment each month, which makes it easier to stick with a repayment plan without missing any payments. It also helps reduce the overall interest you accrue because of lower rates and waived fees.
Minimize Financial Loss on Your End
There may be times when you cannot pay all of your debt at once and settle for paying the minimum balance due each month. This can put you in trouble because your debt will only grow with time, and you may not have the resources to pay it off in full.
A DMP helps minimize the financial loss on your end by consolidating multiple payments into one. Your credit adviser can also help by negotiating lower interest rates, waived late fees and other charges, and an extended repayment period. This means that more of your payments will go toward paying down the principal loan balance instead of covering only the interest.
Ensure That You Still Have Money for Savings
Paying off your debt can lead to insufficient funds for savings and other financial goals. A DMP helps ensure you don’t spend too much of your hard-earned money on repaying the debt by providing a payment plan that fits your budget.
Your debt adviser can also suggest an affordable payment plan that will leave you with enough money for savings, investments, or other financial goals. This way, it’s easier to get out of debt and stay on top of your finances without sacrificing your personal goals.
Educate You About Financial Management and Security
Many people incur debts because of a lack of financial knowledge. A DMP can help you understand how to manage your money better and stay out of debt in the future.
Your credit counselor will provide valuable insights into budgeting, money management, and other factors that can help improve your financial literacy. You will also improve your credit score by staying on top of your payments and eliminating your debts.
Give You a Sense of Control Over Your Life
Having debt can be overwhelming and create chaos in your life. It can also become a source of financial and emotional stress if you do not have the resources to pay it off in full. Additionally, it can affect your relationships and career, causing more problems in the long run.
A DMP can help you regain control over your life by providing a tailored payment plan that eliminates debt and helps improve financial security. You will be able to control your finances better and have more peace of mind knowing that you are on the right track.
Where Can You Sign Up for a Debt Management Plan?
When considering a debt management plan, look for a licensed and accredited credit counseling agency. Some non-profit organizations provide budget and debt counseling services to help you manage your finances better.
Research and find an organization that has a good reputation and offers personalized services. These organizations should have trained experts who can assess your financial situation and provide tailored repayment plans to help you get out of debt faster with minimal financial loss.
How Does a Debt Management Plan Affect Your Credit Score?
Your debt counselor may advise closing some of your accounts once you begin a debt management plan. This may initially impact your credit utilization ratio, also affecting your credit score.
Although there may be a temporary dip in your credit score, it should rebound once you start making regular payments on time, pay down your balances, and get closer to debt freedom. Your adviser may also convince your creditors to re-age your accounts as current, improving your credit score.
Start Eliminating Your Debts Today
A DMP can help you stay on top of your debts and provide financial security. It can also give you the freedom to pursue other goals without worrying about the mountain of debt on your shoulders.
If you are struggling with your debts, we can help. Debt Reduction Services and Money Fit by DRS provide personalized debt management plans to help you manage your debt and get back on track with your finances.
Contact us today to start your journey to becoming debt-free.
About the Author
Rick has been in the financial and credit counseling industry for over 20 years. He is currently a HUD certified housing counselor and has well over a decade of experience as a certified credit counselor. Rick writes regularly on matters relating to consumer finances and is a contributor for many publications on these topics.
