Debt Management Programs: The Pros and Cons of Each

Debt Management Programs: The Pros and Cons of Each

The number of strategies, tactics, and services available can be overwhelming when you’re preparing to pay off debt. There are many “debt relief” options, but sorting through them and figuring out who to trust can be difficult. That’s why the NFCC published the Ultimate Debt Relief Comparison White Paper., which walks readers through a detailed overview of each method. It covers costs, credit score impacts, timing, and other important considerations in your decision. That resource can be very helpful in evaluating your options, but a quick and dirty rundown might also be helpful. Therefore, this post will mainly focus on the pros and cons of each type of professional debt relief. And then, if you want to learn more, you can check out the full whitepaper.

What is debt relief?

Before we get into the details, let’s clarify what debt relief means. Debt relief is a broad term that describes measures taken by borrowers to reduce their debt by working with creditors or other third parties. This can take multiple forms. Some forms of debt relief are formal, structured programs, while others are simple strategies anyone can use. However, this definition does not include simple debt payment strategies (such as paying more than the minimum monthly payment to speed up debt repayment).

“Debt relief,” as we use the term here, requires the borrower to work with another party. This post will look at debt settlement, focusing largely on professional settlement (working with a company) rather than a so-called “DIY settlement.” We’ll discuss debt consolidation, which may involve working with a consolidation company or other creditors. We will cover bankruptcy, which involves the federal court system and creditors. And we’ll talk about debt management plans involving creditors and nonprofit credit counselors.

Debt Payment

Description

Debt settlement is an agreement between a borrower and a creditor that the creditor will consider an account satisfied in exchange for less than the full balance. Borrowers can negotiate this independently (“do it yourself” or DIY settlement), although there are many caveats and potential pitfalls. Borrowers with multiple debts or who don’t know how to negotiate a settlement on their own may consider seeking the help of a debt settlement company.

Advantages

• If the debt settlement is successful, the borrower may have saved money by paying less than the total balance owed.

Disadvantages

• Debt settlement is generally not successful. One major study showed that less than half of debts were paid off after three years.
• Debt settlement is expensive because of the fees you must pay to the settlement company, which can be anywhere from 15 to 25 percent of the debt listed.
• The forgiven debt is considered taxable income, which reduces any “savings” you may have using this method.
• Debt settlement encourages late payments, which will appear on your credit report. The NFCC estimates that debt settlement causes a credit score drop of 100 points or more in most cases.

Debt Consolidation

Description

Debt consolidation is the process of converting multiple debts into one debt. It is similar to refinancing and is often used to obtain better debt terms, such as lower interest rates. People can seek debt consolidation directly with creditors by opening a new credit card and using it to pay off the old debt in a balance transfer. This new balance transfer card typically has a low or no interest rate promotional period.

Consumers can also get consolidation loans. These products are sometimes offered by companies that market themselves as debt consolidation companies. The loans work similarly to a balance transfer card but may have higher interest rates.

Advantages

• Debt consolidation can be used to pay off debt with little or no interest if you have excellent credit and qualify for the best rates.
• Debt consolidation can also allow you to make fewer monthly debt payments.
• Debt consolidation can improve your credit utilization, which could help your credit score.

Disadvantages

• Debt consolidation may not be useful for people with lower credit scores who don’t qualify for the best interest rates.
• Balance transfers generally incur transfer fees.
• Promotional rates expire, so debt consolidation may only be feasible if you can pay off the debt quickly.
• Financial education resources do not accompany consolidation or help borrowers make positive changes in their financial habits.
• Consolidation involves opening a new account, which slightly negatively impacts your credit score. If you also leave old accounts open, you may have a significant amount of credit available, which could create problems if it causes you to spend more and overload your credit.

Bankruptcy

Description

Bankruptcy is a legal proceeding in which an individual can have a debt discharged (forgiven). There are two types: Chapter 7 and Chapter 13. Chapter 7 is faster and may involve canceling more debts. However, you will only qualify for Chapter 7 if you pass the means test.

Advantages

• Bankruptcy may be the best solution for some people and the only viable way to get out of debt.
• Both bankruptcy chapters provide for debt forgiveness.
• Chapter 7 is a quick process.
• Bankruptcy involves required counseling, which provides financial education.

Disadvantages

• Bankruptcy has a huge negative impact on your credit score. Chapter 7 bankruptcy stays on a credit report for 10 years, while Chapter 13 stays on a credit report for seven years.
• Bankruptcy may require you to lose assets.
• Chapter 13 bankruptcy generally takes three to five years to complete.
• Both bankruptcy chapters involve court costs and attorneys’ fees.

Debt Management Plan (DMP)

Description

A debt management plan is a structured repayment program administered by a nonprofit credit counseling organization in which a borrower pays off unsecured debt. The borrower makes a monthly payment to the credit counseling organization, and the credit counselors then distribute the payment to creditors. Enrolled accounts are generally awarded lower interest rates, and no fees are charged.

Advantages

• A successful DMP involves paying everything you owe on enrolled accounts.
• You make a monthly payment; You get the benefits of consolidation without technically consolidating the debts.
• A DMP provides lower interest rates and waived fees.
• A DMP provides a structured plan along with counseling and educational resources.

Disadvantages

• Because a DMP is a structured program, it can take longer than other methods. Usually, it takes three to five years.
• DMPs generally require a nominal monthly fee.

Debt Management Program Guide

A debt management program can help you get out of debt faster with a lower monthly payment.

If you’re having trouble paying off high-interest-rate credit card debt on your own, a debt management program (DMP) may be the solution.

It can help you pay down debt faster in a way that works on your budget by minimizing interest. Under the right circumstances, it can save you time and money as you get out of debt.

Plus, you don’t need good credit to qualify, which means it can work for you even when other solutions, like do-it-yourself debt consolidation, can’t.

This guide will help you understand how a debt management program works and how you can decide if it is the right solution for you.

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Table of Contents

What is a Debt Management Program?

How does it work?

Debts you can include

Calculate your savings with a PMD

Pros and cons

credit impact

What is a debt management program?

A  debt management program (PMD)  is a payment plan designed to help you eliminate high-interest-rate credit card debt. You enroll in the program through a credit counseling agency that helps you find a monthly payment that fits your budget.

It’s not a loan, just a better, more efficient way to pay off your credit card and other unsecured debt. Think of it as a consolidation and payment plan assisted by professionals.

How does a debt management program work?

1. Before you start the process of signing up for a DMP, you should get free credit counseling to make sure you’re a good fit.
2. A certified credit counselor reviews your debt, credit, and budget to  answer two key questions :
   1. Are you eligible for the program?
   2. Do you have better options for relief?
3. If a DMP is the best option for your unique financial situation, the counselor will work with you to find a monthly payment that fits your budget.
   1. Fees are included in your monthly payment, so you don’t need to worry about an extra bill.
4. The credit counseling team then contacts each of your creditors to negotiate three things:
   1. Have your creditors accept payments through the program.
   2. Reduce or eliminate interest charges on your accounts.
   3. Stop future sanctions and penalty charges.
5. Once all of your creditors agree, your program officially begins.
6. You pay the credit counseling agency, and they distribute the funds to your creditors on your behalf.

What types of debt can I include in a debt management program?

Credit cards

A PMD is primarily designed to help you find relief from credit card debt. This includes:

• General purpose credit cards, such as Capital One and Chase
• Credit cards, such as American Express
• Stock up on credit cards, like Amazon, Lowe’s, and Macy’s

unsecured debts

You can also include most other types of unsecured debt, including:

• personal loan
• consolidation loan
• In-store lines of credit for furniture and electronics

It cannot include student or secured loans like mortgages or car loans. In some cases, you may include payday loans. However, this depends on whether the payday lender agrees to allow you to enroll your account in the program.

collection accounts

It may include collection accounts for unpaid medical bills, service contracts, and utilities. However, these accounts do not have interest charges, so you lose one of the main benefits of signing up. However, if you want to get your collection accounts paid and put into the program, the counseling team can contact collectors to see if those debts can be included.

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Calculate your savings with a PMD.

See how much more you can save.

Let us know the total amount of your debts, and we will prepare an estimate of how much your payments will be if you consolidate your debts.

debt

Calculate Savings

Comparison of the pros and cons of the debt management program

Each debt relief solution has its advantages and disadvantages. The best solution for one person may not fit the needs and goals of another. So deciding whether a debt management program is the right solution depends on your goals.

Here are some real numbers on how the Consolidated Credit program benefits people who enroll:

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

Proscons

Pay everything you charged to the cards Accounts included in the program will be closed when you complete the program.

A PMD reduces or eliminates interest charges. You may not open new credit card accounts while enrolled.

Also, future fines and fees PMDs take longer and cost more than debt settlement.

A PMD generally has a positive or neutral impact on your credit.

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Understand the credit impact of the program.

How will the plan affect your credit report?

A debt management program generally has a positive or neutral effect on a person’s credit score.

• There is no negative information that your creditors report to the credit bureaus when you enroll in or complete the program.
• Your credit cards will show up as paid as agreed on your credit report, which is the status you want them to be.
• Additionally, every payment you make on your PMD will build a positive payment history for those accounts.

Therefore, from a credit reporting standpoint, a debt management plan will positively affect your credit history. This gives PMDs an advantage over debt settlement programs, which incur a 7-year credit penalty for each debt you pay off.

How a debt management plan affects your credit score

There are a few minor ways the program can change your credit score. Once you complete the program and the credit card companies close your accounts, this can cause your credit score to drop slightly for two reasons:

1. It decreases the number of active accounts you have open, which is a minor scoring factor.
2. Closing your oldest accounts can lower your “age of credit history,” which is another minor scoring factor.

Credit age and account types together account for 25% of the “weight” in calculating your credit score. On the contrary, credit history only represents 35%. That’s why a PMD is usually positive for most people’s credit. They build a positive credit history, which usually outweighs any slight drop in points from closing some accounts.

However, if your credit score is extremely high when you sign up, you may see a slight decrease. If you have excellent credit, talk to your credit counselor about how the plan may affect you.

Consider the advantages and disadvantages of debt management plans to decide if it’s the right debt solution for you.

 Do you want to get out of debt? Complete our form and find the solution to your debts for free. 

A debt management plan (DMP) is an assisted form of debt consolidation. You establish a voluntary debt payment plan through a nonprofit Consumer Credit Counseling Agency. It has pros and cons, so it’s important to ensure this is the right solution for your needs.

Debt Management Pros

#1: You can use this solution even with bad credit

A credit score is not a factor in qualifying for a debt management program. That means you can have bad credit and still use this program. That’s a big advantage over other do-it-yourself debt consolidation solutions, which require good to excellent credit to be used effectively. This is the only way to consolidate debt into one monthly payment for people with bad credit scores.

#2: Offer a low monthly payment to cover all your bills

Consolidation simplifies bill payment by accumulating your credit card debt in one monthly payment. That payment is typically lower than what you would pay on all your bills individually. In the case of a debt management plan, it typically reduces your total monthly payments by as much as 30-50 percent.

You read that right: A debt management program usually offers a lower monthly payment than you are now. So you can also get some breathing room in your budget.

#3: Drastically reduce the amount of interest you pay

One of the main goals of a debt management program is to reduce or eliminate interest charges on your debts. Data shows that people who use the program typically see their rates reduced between 0-11 percent. This can cut youthetal interest expense you pay in half or more. That saves you money as you pay off your debt so you can use it for bigger and better things.

#4: You can get out of debt faster

A minimum payment schedule is not designed to be an effective way to eliminate debt. If you always make minimum payments, expect to be in debt for a few decades ( no kidding ). On the other hand, average payment periods in a debt management plan range from 36 to 60 payments. In other words, you can be debt free in less than five years.

This way, you can get out of debt by applying less money each month, less cash, and faster. The reason? This type of program allows you to pay off your debt more efficiently. You reduce or eliminate interest charges, s that more of each payment you make goes toward paying principal (or principal); that is th,e original debt you owe. As a result, you can get out of debt faster, even if you pay less each month.

#5: This can stop penalties and collections

Keeping up with your debt payments creates a lot of financial stress. Not only will you be worried about catching up, but you’ll also face heavy penalties every time you miss a payment. That stress worsens if the creditor declares his debt uncollectible ( charge off ),d it then goes to collections. Then it would help if you dealt with the constant phone calls and harassment from debt collectors.

Enrolling in a debt management program stops future penalties on your credit accounts. When the credit counseling agency calls you to negotiate your interest rate, the creditor agrees to stop them. If they agree to let, the agency include your debt in their schedule, your adjusted payment counts as the monthly payment you must make. Therefore, no new penalties can be added.

Additionally, this can also stop collection actions. If you have debts already sent to bad debt collections by the original creditor and want to include them in your PMD, your Counseling team will contact those collectors. They can agree that the agency includes the account receivable in their PMD. In that case, those annoying collection calls will stop. Also, if a collector calls, you can refer them to the credit counseling agency. They will deal with collectors on your behalf.

Cons of Debt Management (PMD)

#1: This freezes any account you include in the PMD

Once you enroll and the creditor agrees to your adjusted payment schedule, your accounts are immediately frozen. That means you can only make new charges to your account once you complete the program. This can be difficult if you rely on credit cards to cover part of your monthly budget.

With your reduced payments, staying on a budget will generally be easier. You won’t need to juggle bills or choose which necessities you can pay for each month. However, when you see it, you won’t have that instant gratification of using credit to buy something you want.

The other good news is that you don’t have to include all of your accounts in the program. You have that right if you want to leave a card for emergencies. You can even add the account to your program later if you’d like.

#2: You can’t apply for new credit cards during enrollment

The idea with a PMD is that you stop making new charges entirely while eliminating your debt. So not only are the accounts you include in the program frozen, you can apply for new credit cards too. If you do, you can expect a denial letter.

This does not apply to any closed line of credit financing. It means you can still apply for loans during your enrollment and get approved. If you need a mortgage or a car loan, you can get it. You can even apply for private student loans if you want to go back to school. It only applies to open unsecured lines of credit, which largely refers to credit cards.

#3: When the program begins, there is a slight risk of credit damage

A debt management program is supposed to have a positive or neutral effect on your credit. Since you pay back everything you borrow, you are not penalized like in debt settlement programs.

In fact, many people who enroll see their credit scores improve once they complete the program. You pay back what you borrowed, and by sticking to the payment schedule, you also build a positive credit history.

However, some people who enroll experience a credit score drop early in the program. It’s not because the program hurts your credit. The enrollment process needed to be fully explained so that payments may be missed. Here’s the trick:

1. When you sign up for a debt management program, you and your credit counselor set up a payment plan that works for your budget.
2. They send you documentation to sign, authorizing the agency to work on your behalf.
3. However, signing up for the program is not the last step in the enrollment process! The agency must call each of your creditors and get them to agree to the adjusted payment schedule.
4. So while they’re getting all your creditors to agree, your program has yet to start technically.
5. That means you must continue to make the minimum payments on your accounts UNTIL all of your creditors sign off and your program starts.
6. You then stop making payments to your creditors and start making the single consolidated payment to the credit counseling agency.

This is where credit damage typically occurs with PMDs. If the credit counselor fully explains the setup process, people may assume they can stop making payments now. Then, missed debt payments occur, leading to notices of demand for payment from your creditors and that is when they fear they have been scammed.

The true credit advantages of a Debt Management Program

When a program is fully explained and executed correctly, this credit damage does not occur. Again, in the worst case, the program should neutralize your credit score, meaning your score would not change. Most people generally see their scores improve with the completion of the program.

The effect of the credit depends on where your score was when you signed up. If you had bad credit (like a 500 FICO score) when you started, your score would usually go up. Eliminating your credit card debt improves your credit utilization ratio, which accounts for 30% of the credit score calculation weight. It also creates a positive payment history, weighted 35% in your score calculation. Improving those two factors will push you to a bad credit score.

However, if you had an excellent credit score when you started, you only have a little room for improvement. If you already have a 750 FICO, you only have a little room to grow beyond that. Positive payment history doesn’t have a huge impact. If you bring your utilization rate down to zero, you may gain a few points, but it won’t be much of a jump.

If you’ve managed to maintain excellent credit while struggling to pay off your debt, consider rolling up carefully. An excellent credit score means you may be better off using a do-it-yourself option, such as a debt consolidation loan. With that, there’s no risk of credit damage unless you miss payments. But you don’t have to worry about an enrollment period when things could go wrong.

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Debt Management Programs: The Pros and Cons of Each