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A debt management plan (DMP) is an effective way to rid oneself of unsecured debt such as from credit cards and medical bills. However, like all strategies, DMPs have benefits and drawbacks. You’ll have to decide if enrollment in a such is right for you. With that said, here are debt management plan pros and cons.
What is a Debt Management Plan?
This is a type of debt repayment plan that’s established and managed by a credit counseling agency. Such agencies – most are nonprofit – have accredited financial counselors who provide money-management education and assistance.
It’s common for consumers to see a counselor for such assistance, which can include establishing a budget. But after going over the consumer’s situation, the counselor may conclude that the circumstances are more acute and call for a DMP.
Such a plan involves the counselor working with creditors on your behalf to set up new payment arrangements that work better for you.
How Do DMPs Work?
If the consumer – you — agree to erase the debt through a DMP, negotiations with creditors may also yield waived fees and a lower interest rate. After all, you’ll have an easier time clearing your balances when you accrue less interest every month. The agency’s goal is for you to be out of debt in three to five years.
Overall, though, you’ll benefit from having to make just a single monthly payment to the counseling agency, which will disburse the funds to your creditors.
What Kind of Debt is Accepted?
In general, only unsecured debts are accepted. These are debts – typically credit cards — that aren’t linked to collateral such as a house or car.
If your balances are overwhelming, there are debt programs such as those offered by www.freedomdebtrelief.com that can possibly settle your debt for less than what you owe.
- You’ll have a professional helping you.
- No more calls from debt collectors.
- The plan nixes late fees that can worsen your financial situation.
- A DMP can render your credit accounts current, which can improve your credit score.
- Sticking with the plan and consistently making on-time payments will also, over time, improve your score.
- You’ll likely emerge debt free in three to five years – much less than the time it would take for you to erase your debt on your own.
- A debt management plan will help you to stay organized and on top of your bills and payments.
- Such a plan is essentially credit card consolidation sans a loan, which means you needn’t assume additional debt to clear existing obligations.
- There may be a nominal charge for program enrollment or maintenance, although some fees may be waived.
- There’s no guarantee that every creditor will agree to the plan, which means you’ll have to pay holdouts independent of the monthly DMP payment.
- You must be committed to making your payment consistently until your debt is paid off. If you miss a payment, you may be booted from the program.
- You’ll have to close your credit card accounts so that you don’t accrue even more debt. You also will be asked to not apply for new debt.
You can use these debt management plan pros and cons to help you decide whether a DMP suits you. And remember that if your debt situation is too far gone, there’s always debt settlement, which can keep you from filing bankruptcy. For help with debt settlement, we do recommend Freedom Debt Relikjef for its experience, accreditation, and success rate.