Is a Debt Management Plan Right For You?

Do you want to pay your debt off while paying reduced interest rates? A Debt Management Plan (DMP) might be what you’re looking for!

When you’re in the process of paying off your debt, the entire thing can become very overwhelming. You have several creditors to deal with, different companies that call you weekly, and don’t even get me started on the interest rate you’re paying.

A debt management plan is a tool to pay off your unsecured debt in 3-5 years, mostly credit card debt. You can enroll in a DMP, and they will negotiate a better interest rate. You only have to make one monthly payment, and you can finally put the debt behind you.

Here’s exactly what a debt management plan is, everything you need to know before you consider enrolling, and the best debt management companies for you to check out.

What Is a Debt Management Plan?

A debt management plan is a debt relief option by paying off unsecured debts over time. If you can't afford to pay off the debt in full and you’re overwhelmed by debt, it’s an option. Debt management companies deal directly with your creditors for you. The goal is for them to decrease your monthly payments, get any penalties waived, and reduce interest rates on your outstanding debt.

The plan is typically designed by a company, like a credit card provider or a debt management company. They will help you manage your spending. It takes on average between 3-5 years to pay the debts off, but it saves you money in the long run due to reduced interest and penalties.

A debt management plan is used to pay off credit cards, medical bills, and other types of unsecured debt.

Why You Need a Debt Management Plan?

Debt management plans are one of the most effective ways to get rid of debt. They help people in reducing their monthly payments and also establish a better budget plan. Plus, they help people organize their debt obligations to pay them back without incurring a lot of extra costs and waive late fees.

Debt management plans help people with their finances by consolidating their debts into one loan with one monthly lump payment. That is an excellent option because they can often save money on interest and create a budget plan.

Your monthly payment will reflect what you can afford on your current income. Plus, you have to agree to the amount before you start paying.

Debt management plans usually take between 3-5 years. It starts with calculating the person's income, and then they decide how much they will pay each month.

Pros and Cons of Debt Management Plans

Here are the pros of a debt management plan:

  • You get professional advice.
  • Lowering the interest payment means faster repayment of your debt. It often significantly cuts your interest rates.
  • You only have to deal with one party, as your debts are consolidated with one company, and they will distribute your payment. Plus, you’ll make a single monthly payment.
  • You’ll get fewer calls and mail from debt collection agencies.
  • Lastly, you will have an improved credit score in the long run.

Debt management plans are designed to help people who are unable to pay back their debt, but this can come with some drawbacks:

  • You will pay a small fee that’s often compensated by the lower interest rate but is a fee nonetheless.
  • Not all your debt is included, as DMPs only focus on unsecured debt.
  • When you miss a payment, it can influence your lower interest rate.
  • Repayment takes 3-5 years, during which you can’t open new credit lines like credit cards.
  • Most companies urge you to cancel your credit card accounts and don’t use credit cards, meaning you’ll have less credit available.

Best Debt Management Companies

Debt management companies focus on solving debt by providing various ways to help people pay off their debts. In turn, a debt management program receives a fee for its services.

A debt management company can help you create a budget, negotiate with creditors on your behalf, and provide guidance and counseling to anyone who is struggling with debt.

Here are the best debt management companies for you to try out, all rated with an A+ from the Better Business Bureau.

Money Management International (MMI)

MMI is a nonprofit debt management company available in 50 states online and in-person in 25 states. Their debt management plans last between 3-5 years.

The startup fee at MMI is between $0 and $75, where the average startup fee is $35. Their monthly fee ranges from $0 to $50, with an average of $24.

Cambridge

Cambridge is a nonprofit credit counseling agency that helps clients in 48 months, where the interest rates are often reduced from 22% to around 8%. An excellent service that credit counseling agencies typically offer is a credit counseling session to see if your debt management plan may work for you.

Startup fees and monthly fees vary by state. The average startup fee is $42, and their average monthly fee is $30 per month. Cambridge offers their services in all states except Minnesota.

GreenPath

GreenPath Financial Wellness is a company that helps people repay their debts within 3-5 years. Their startup fee is between $0 and $50, averaging $35 per debt management plan. You also pay monthly fees of between $0 and $75, averaging $29.

GreenPath is available in 50 states and is an excellent choice if you want to manage your debt online. If you’re going to see them in person, they’re your best choice if you live in one of the 21 states where they have physical offices.

Alternatives to a Debt Management Plan

When you want to pay off your debt, there are several options you can consider, and a Debt Management Plan (DMP) is just one of them. They all are different, so here are the alternatives to a debt management plan:

  • If you have several small debts that you can pay off yourself, you can use the debt avalanche method to pay off the remaining debts yourself.
  • Consolidation loans are for those with good credit and want to consolidate the loans into one loan with a reduced interest rate. You can also determine how long you want the loan to be and open new credit when necessary with a debt consolidation loan.
  • Filing for bankruptcy is a great way to get out of debt when the debt is more than half your annual income. Bankruptcy will wipe the slate clean, and you can start fresh. You can seek help from an experienced bankruptcy lawyer to help navigate the process and answer any questions you may have as you go through this difficult time.

Frequently Asked Questions

What is a Typical Debt Management Plan?

Debt management plans are a financial strategy that reduces your overall debt through a monthly payment. They are an excellent choice if you have trouble making payments or are behind on payments.

Debt management plans can be beneficial because they allow you to pay off your credit cards and other debts by consolidating your payments into one monthly payment. This type of plan also helps people with bad credit because it can stop the revolving cycle of interest rates, leading to more debt.

Is a Debt Management Plan Bad for Credit Rating?

A debt management plan allows consumers who have overdue debts to pay off those debts in one lump sum payment. The program will typically lower the total amount of interest that a person pays over the life of their debt, which can be helpful if they are having difficulty making payments.

The credit reporting agencies Experian, TransUnion, and Equifax agree that a debt management plan will not negatively affect your credit rating.

However, your score may dip initially, and it could take a few months before your credit score is back up. That’s because your reduced payments will reflect on your credit report in the short term. In time, your regular and on-time payments make sure your credit rating bounces back.

How Long Does a Debt Management Plan Last?

Debt management plans usually last for a period of three to five years. That is how long it will take to pay off the debt and regain financial stability.

The credit card companies will charge interest rates from 10% to 20%. That is what makes debt management plans so attractive. When the credit card companies agree to charge minimal interest on the money put towards paying off the debt.

Many people decide to deal with their debt aggressively and use any extra money they receive towards their debt, which may shorten the timespan of your DMP without any penalties.

All in All – Debt Management Plan

Are you looking for debt settlement, paying off your debt faster, and improving your financial situation? A debt management plan is just what you’re looking for!

A debt management plan means you will pool your debt with one national foundation to reduce interest rates, get a lower monthly payment, and get financial counseling. While this will cut your time to paying off debt drastically, you also should be aware that not all your debt is included, and you need to cut down on your credit usage or close your credit cards entirely.

A debt management plan is the best option for you if you can pay your monthly payments, you mostly have unsecured debt like credit card debt, and you can go without opening new credit lines for 3-5 years.

A company that stands out in the debt management sphere is Resolve. Resolve lets you choose what amount you want to pay monthly, and the average person saves $2,738 in their first year with them.

Start paying off debt now, and you will thank yourself later!

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Michael launched Your Money Geek to make personal finance fun. He has worked in personal finance for over 20 years, helping families reduce taxes, increase their income, and save for retirement. Michael is passionate about personal finance, side hustles, and all things geeky.