Is a Debt Management Program the Right Choice for You?

 

See how debt management programs help people get out of debt faster with payments that are 30-50% less.

High interest rate credit card debt has a way of trapping people in a cycle of payments. You diligently make payments every month, but never seem to get any closer to zero. You need to find a better way to get out of debt. A debt management program could be the best choice to pay off your debt while helping you save money. Here’s what you need to know.

What is a debt management program?

A debt management program (DMP) is a repayment plan designed to help you eliminate high interest rate credit card debt. You enroll voluntarily through a credit counseling agency that helps you find a monthly payment that works for your budget. It’s not a loan – just a better, more efficient way to pay off your credit cards. Think of it like a professionally-assisted repayment plan.

How debt management programs work

  1. First, a certified credit counselor reviews your budget, debt, and credit. They check for two things:
    1. Are you eligible for the program?
    2. Do you have any better options for relief?
  2. If a DMP is the best choice for you, the counselor helps you find a monthly payment that fits your budget.
    1. Fees are included in the monthly payment, so you don’t need to worry about an extra bill.
  3. Then the credit counseling team contacts each of your creditors.
    1. Your creditors agree to accept reduced payments through the program
    2. They also reduce or eliminate interest charges on your accounts and stop penalties.
  4. Once all of your creditors sign off, your program starts.
  5. Each month, you make one payment to the agency and they distribute the funds to your creditors on your behalf.
  6. During enrollment, your creditors will freeze on your accounts. Your counselor will help you work out a budget, so you won’t struggle to live credit-free.

If you ever have trouble making a payment, you can call the agency and they can help you work out a solution. You can leave the program at any time; your accounts are credited for all payments made during the program.

Answers to common debt management program questions

Our team of certified experts answers questions about all the time to help borrowers make informed decisions as they work to get out of debt. This playlist features video responses to all the Ask the Expert questions we’ve received about a debt management program.

One of the most common questions we receive about a debt management program regards the fees. This video explains how fees are calculated and sets the maximum you can expect to pay.
  1. What are the Fees for a Debt Management Program?

    What are the Fees for a Debt Management Program? One of the most common questions we receive about a debt management program regards the fees. This video explains how fees are calculated and sets the maximum you can expect to pay.

    What are the fees for a debt management program?

    Fees are based on your budget, how many credit cards you have and how much you owe. The average client pays about $40 a month. And while the fees vary state by state, they’re limited to $79 a month.

    Debt management program costs are governed by the Uniform Debt Management Services Act. But, here’s the best part – those fees are rolled into your debt management program, so there’s no separate cost.

    And those fees are just a small percentage of how much money you’ll save by getting rid of your debts with the reduced interest rates. You’ll pay less, while saving a lot.

  2. What Types of Debt Can't Be Included?

    What Types of Debt Can't Be Included? A debt management program can help you pay off a variety of debts, but not all of them. Learn which debts you can and can't include when you enroll.

    The main type of debt that we don’t work with – which is an easier way for me to answer your question – is anything that’s secured, which means if you didn’t make payments, is there something they can turn off or take away. If you owe money to the electric company, if you don’t pay them they’re going to turn your electricity off. Or if it’s a car payment and you don’t make the payment they’ll take the car away. Those types of debts we can’t work with. The debts that we work the best with are credit card companies, loans, medical bills, and other kinds of unsecured loans.

  3. Can I Enroll if I'm being Sued?

    Can I Enroll if I'm being Sued? If a creditor or collector takes you to court in an effort to force repayment, all is not lost! Learn how a debt management program may help you avoid a court judgment that could lead to things like wage garnishment.

    First you need to be clear that they’re actually suing you. Did you receive court documents or did someone just say to you that they may consider legal action as a next step? If a debt collector is seeking legal action, we can still contact them on your behalf and see if they’re willing to take payments. There’s nothing we can do to stop the legal action. They just want someone to contact them and tell them how much money the client can afford and set up payments. If they’re saying they’re thinking about seeking legal action or you’ve got a pending date, either way you can still join the debt management program, we’ll still contact your creditors. We can’t offer any legal advice and we can’t stop the court date, but we can still set up payments that may stick straight through your court date. Always keep in mind that enrolling in a debt management program means that a certified credit counseling team is acting and working on your behalf in negotiating with your creditors. Essentially, you can’t enroll in the program unless your creditors agree to the adjusted payment schedule you set up with your credit counselor.

  4. Are Spouses Required to Enroll Together?

    Are Spouses Required to Enroll Together? If you and your spouse hold debts jointly, then you will be required to enroll together. Learn how cosigning and authorized use affects debt management program enrollment.

    Ok, you’re asking a very good question about do a husband and wife need to be on a credit counseling account together, and the answer is it really depends on your situations. There are reasons why you would want both people on the program and reasons why you may not want both people on the program, and it would really involve me getting to know more about what your individual situation is outside of the debt management program. The only people who are obligated to participate in the debt management program are the people who are the actual signers on the accounts. These are the people who have signed the loan application, promising the credit card companies that they’re responsible for making the payments. This is different from an authorized user. You may have a credit card and you could ask the credit card company to give you another card in your husband’s name, and then he’s just an authorized user – he never signed a piece of paper saying that, “If neither of us pay, I’m still responsible for paying.” If that card is with a bank that you’re also including another card from that bank on the program that’s just in your name, you would have an issue that would affect that card. The simple answer is, if want to just put your cards on the program you can, we can do the budgeting work just on you, we can do it on you and your household, or we can do both. But in the end, if your name’s on the card you’re the only one who has to join the program.

  5. Do I Have to Close My Accounts?

    Do I Have to Close My Accounts? A debt management program does lead to a freeze on any accounts that you include in the program. However, there are options you can use to keep a card out of the program if you need it for emergencies.

    Laura from Independence, Kentucky asks if she has to close all her credit cards if she joins the program or if they stay open. You have to close all of the cards you put on the program. Creditors don’t want you to use the cards when you’re having a benefit from a debt management program. But if there’s a card that you can keep out of the program, you can do that. You can keep the card out and use it for emergencies.

  6. Can I Add Accounts to My Program?

    Can I Add Accounts to My Program? If you decided to leave a card out of the program and then you decide you'd like to include it, this video explains how to talk to your credit counselor to ensure you're on the same page.

    You can add cards to the program after you’re already on it. You just need to be careful about why that card wasn’t put on the program when you first started. Be aware if you want to leave a card off the program – for whatever reason – it’s extremely important that you talk to your counselor in advance about why you’re leaving that card off the program. If something unfortunate happens after the fact, you can add it to the program.

  7. What Happens Once I Pay Off an Account?

    What Happens Once I Pay Off an Account? As you make payments on a debt management program, you will see the balances on your credit cards gradually go down. This video explains what happens when you pay off an account completely before the program ends.

    So the average person has between seven and ten credit cards on our program. It’s very common for one or two cards to get paid off early on in the program. It doesn’t lower your monthly payment, we just take the money that used to go to those two credit card companies and we’ll send them to the rest of your creditors. In general, we’ll usually send them to the creditors that are charging you a higher interest rate. So it saves you more money and gets you out of debt faster.

Get results faster than you think, for less each month

The reason debt management programs work centers on interest rate negotiation. Nonprofit credit counseling agencies have established relationships with creditors and proven records of helping customers pay off debt. That means they can negotiate lower interest rates that you can negotiate on your own. Even if you’ve tried to negotiate with a creditor and failed, credit counseling can help you get results.

In addition, because you minimize interest charges, you can get out of debt faster, even though you may pay less each month. Here are a few case studies from real clients of Consolidated Credit:

Debt management program pros and cons

Every debt relief solution has its upsides and downsides. The best solution for one person may not fit the needs of the next. Deciding if a debt management program is the right solution depends on your goals.

Here are some real numbers for how Consolidated Credit’s program benefits people who enroll:

  1. Clients see their total credit card payments reduced by up to 30-50%
  2. Negotiated interest rates average between 0% to 11%
  3. Most clients complete the program within 36 to 60 payments

But before you decide, these are the pros and cons you need to consider:

ProsCons
You pay back everything you chargedYour creditors freeze your accounts when you enroll
A DMP reduces or eliminates interest chargesAccounts included in the program will be closed when you graduate
It also stops future penalties and feesYou can open new credit card accounts while you’re enrolled
Your monthly payments are usually lowerDMPs take longer and cost more than debt settlement
A DMP usually has a positive or neutral impact on your credit

Debt management vs debt settlement

If you’re looking at pros and cons, you probably want to know how this solution compares to others. The other professionally assisted program that provides debt relief is a debt settlement program or DSP. A DSP lets you get out of debt for a percentage of what you owe. That means settlement is usually faster and cheaper when it comes to the total amount you pay to get out of debt. When clients sign up for a debt management program, they usually start receiving calls from settlement companies that try and lure them away with a quick fix. But they downplay how much damage it will do to your credit.

It’s not that settlement isn’t beneficial, but it’s intended for people that are in a different place with their debt. Settlement is best used when most of your debts have already been charged off and sold to collectors. In this case, a debt management program is not as beneficial.

When credit card debt goes into collections, by law collectors can’t charge interest. So, you lose the benefit of interest rate negotiation that you get with a DMP. At the same time, if your accounts are already in collection, the damage to your credit is already done. You essentially can’t fall off the floor, so the penalties from settlement have less of an impact.

On the other hand, if you’ve been working hard to keep your debts current to avoid damage to your credit score, settlement isn’t the right choice. Your credit score has plenty of room to fall, so it’s worth your time to pay back everything you owe.

Debt management vs DIY consolidation

The other solutions you may be considering are do-it-yourself consolidation options, like taking out a debt consolidation loan. DIY solutions always require you to take out new financing to pay off your existing debt. By contrast, a debt management program isn’t a loan or a new debt. You still owe your original creditors; you just pay them back in a way that works better for your budget.

Another concern with DIY solutions is that you need good or excellent credit to make them work. If your credit score isn’t the best, you won’t be able to qualify for the low interest rates you need that make these solutions beneficial.

Finally, you have the account freezes. If you go with DIY consolidation, your accounts will usually stay open and usable. That may sound like a huge benefit over a DMP, but it can actually be detrimental. That’s because it gives you leeway to run up new balances before you pay off the consolidated debt. As a result, you can end up with more debt instead of less.

If you decide to use a do-it-yourself consolidation option, you’ll need to balance your budget and find the willpower to stop charging. This can be difficult to do if you’ve developed a bad credit habit or credit dependence. A DMP can help you get the clean break you need.

How a debt management program affects your credit

What is a debt management program?Overall, completing a debt management program should have a positive or neutral impact on your credit. In other words, your score will stay the same or improve as you make payments and complete the program. That’s because debt management programs improve the two biggest factors used to calculate your credit score.

  1. Credit history accounts for 35% of your score. Since your creditors agree to accept payments through your debt management program, you build positive credit history with every program payment that you make on time. All the credit card accounts you include in the program will be listed as paid on time. This can significantly improve your credit if you have a bad score or keep your credit score where it is if you already have good credit.
  2. Credit utilization is 30% of your score. Utilization measures how much debt you currently have versus your total available credit limit. As you pay off credit card debt, your utilization ratio drops. Lower is always better for your credit score and anything above 30% utilization hurts you. If you ran your cards up to their limits, then a DMP improves your score once your ratio on each account drops below 30%.

It is important to note that at the end of the program, your creditors will close your accounts. This can lead to a slight drop in your score, particularly if the closed accounts were also your oldest accounts. “Credit age” accounts for 15% of your credit score. This measures how many accounts you’ve maintained in good standing over the years. Closing old accounts can have a nominal negative impact. However, the decrease caused by closing these accounts usually isn’t enough to offset the positive gains you get from paying off debt.

Be careful during the enrollment period!

Besides the slight decrease of closing old accounts, the only other way a debt management program can potentially damage your credit is with missed payments. Understandably, once the program is going, missing a payment will need to negative marks in your credit history for all accounts included. However, your credit counseling team will help you set a budget when you enroll. They can also help you make arrangements if you’re having trouble making a payment.

The one thing you need to be cautious of is keeping up with your individual credit card payments during DMP enrollment. After you talk to a credit counselor and find a payment that works for your budget, you’re not immediately enrolled in the program. The counseling team must call each of your creditors to get their agreement on including that debt in your DMP. This is known as the enrollment period.

During the enrollment period, you must continue making payments to your individual creditors until all your creditors sign off. Each creditor will send you a formal acceptance letter and then your counseling team will contact you to let you know your program is starting. Once that happens, you start making payments to Consolidated Credit and stop making payments to your creditors. But until you receive that word, keep making payments to your creditor to avoid unintentional damage to your score.

3 key DMP facts that most people confuse

#1: Debt management is not the same as debt settlement

This program is not the “pennies on the dollar program that the credit card companies don’t want you to know.” We’ve all heard those advertisements. And it’s not that your creditors don’t want you to know, they don’t want to use it. What’s more, you shouldn’t want it either.

Debt settlement is where you settle your debt for less than you owe. It lasts causes credit damage that lasts as long as a penalty for bankruptcy. Debt management simply repays everything that you owe in a more efficient way. Both eliminate your debt, but they do so in very different ways.

#2: DMPs are largely the same, no matter where you go

Credit counseling agencies are nonprofit, so plans differ very little as long as you work with a legitimate organization. Fees cover program setup and administration; they’re also controlled by state law and typically capped at $79.

#3: A DMP is just part of the credit counseling process

Getting out of debt is great, but if you don’t learn better habits you can slide back into debt quickly. A debt management program helps you achieve freedom from debt, but credit counseling teaches you to how to maintain stability. When you dive into the process, you learn to avoid traps that lead to debt.