It is not uncommon for people to bury their heads under the sand when it comes to debt. This is understandable because confronting something as serious as debt is scary.
In fact, many people don’t even know how much debt they are in, they just keep racking it up.
Some people end up filing for bankruptcy, but others just keep running away from it until creditors eventually catch up with them.
You don’t want to become one of those people who allow debt to catch them off guard. Face it today so that you are not living in fear of the future.
A Debt Management Plan | What Is It?
A debt management plan (DMP) is a strategy to help you pay back your debt. It is arranged by a credit counseling agency. They provide assistance and education to help people become better stewards over their finances.
People who use this service will have an appointment with a counselor. The credit counseling company will evaluate your current financial situation and let you know about the options that are available to you. If you meet the requirements for a debt management plan, the counselor will get in contact with your creditors and arrange payment plans on your behalf.
The negotiation often involves a lower interest rate or the cancellation of fees. Most DMPs aim to get you out of debt within five years. When you don’t have high interest rates to pay, this is a realistic goal to achieve. Once the arrangement is in place, the only payment you will need to make will be through the agency. In most cases, you will need to pay a small monthly fee to the agency to use their services.
In general, debt management plans are assigned to unsecured loans such as credit cards, but you will no longer have access to these accounts, even after the debts have been paid, the accounts are closed.
Debt Management Agencies | What Are the Benefits?
When you have maxed out your credit cards and get stuck paying the minimum monthly payments, which gets eaten up by interest, it can feel as if you are never going to get out of debt.
But a DMP will put a freeze on your cards so you are no longer able to spend on them since there is a high chance that the interest rates will be lower. Having this support and discipline will help you gain some momentum toward repaying the debt.
You also have the added benefit of working with a trained counselor who understands how the credit system works. They can help you set up a budget and establish financial goals.
Once you have handed your accounts over to a debt management plan, your creditors will stop calling you and you will have the peace of mind knowing that your debts are being paid responsibly.
A Debt Management Plan | the Disadvantages
DMPs provide a great option for getting out of debt; however, there are also several disadvantages you will need to consider:
Not All Debts Are Included: Debt management plans only include unsecured loans such as credit cards and student loans. If you have other debts, the debt counseling agency can offer you advice, and give you an action plan, but that’s as far as it goes.
Your Credit Score Will Go Down: When credit accounts are closed, your credit score will automatically go down because your credit utilization score is reduced. This is something to take into consideration, but ultimately, your credit score is going to go down anyway if you keep missing payments. Even though it’s a lose-lose situation, the good news is that when you are on a DMP, your debts are actually getting paid off instead of racking up interest rate charges and late payment fees every month.
How To Get Started
If you feel that a debt management plan will help you get back on track with your finances, there is no time like the present and you might as well get started now. A lot of credit counseling services are non-profit, if you want to avoid paying additional fees, it is best you start your search here.
A quick Google search will provide you with a list of agencies you can contact. Call them up and speak to a counselor, they will be able to guide you on what to do next, which will typically involve having a face-to-face interview.
Before your appointment, it is advised that you do a bit of homework.
- Start by getting a copy of your credit report
- Make a note of all the debts you currently have even if they are secured
- List what you aim to achieve with a debt management plan
Getting out of debt is one of the most liberating things you will ever do. However, it is important that you stay out of debt and don’t fall back into old spending habits. Your counselor will give you advice on how to save money, budget, and meet your financial goals, but you must put the advice into practice. Your financial future is important, especially when it comes to retirement, aim to have everything in order before then.