Debt management is a service offered by many companies to help people get out of debt quickly and easily. With a typical debt management plan, your service provider will work with your creditors to reduce monthly payments and interest rates on your debts, as well as avoid penalties. The debt management plan all three parties agree on—you, your creditors, and your debt management company—will allow you to pay off your debt in affordable monthly payments, usually in about three to five years.
How Does Debt Consolidation Work?
Debt management plans fall into the broader category of debt consolidation, which is a set of tools and services designed to help people resolve unsecured debts. Unsecured debts are any debts that are not backed by collateral and include credit card debt, medical bills, and student loans.
Types of Debt Management
Debt management plans (DMPs), also known as credit counseling programs, are a great way to systematically pay down your debts. Most DMPs are voluntary, but some are not.
Standard Debt Management
A standard debt management plan includes a free consultation with a credit counseling agency to evaluate your total debt situation, followed by a proposal for ongoing service with the agency. With this type of DMP, the agency assumes your debts and negotiates with your creditors to lower interest rates and monthly payments. The average debt management plan will last three to five years.
Debt Management by Creditor
Some individual creditors offer their own debt management plans to help you pay of debts you hold with them. This kind of debt management plan is different from the plans offered by credit counseling agencies.
When you file for a Chapter 13 bankruptcy (a type of personal bankruptcy), you’re required to enroll in a DMP or credit counseling program. Under a Chapter 13 bankruptcy debt management plan, your debts will be reorganized and prioritized by the bankruptcy court. You will usually be required to make payments over the course of three to five years, after which any remaining debt may be discharged. Chapter 13 bankruptcy will usually take a major toll on your credit score.
Enrolling in a Debt Management Plan
Enrolling in a voluntary debt management plan may seem like a no-brainer if you’re weighed down by unsecured debt. However, the decision to commit to a debt management plan isn’t one to take lightly. Before enrolling in any type of debt management plan or debt consolidation plan, make sure you know what you’re getting into for the short- and long-term.
Who Should Enroll and When
A debt management plan isn’t right for everyone, and not all debt situations require debt management. For example, debt management plans, for the most part, only work for unsecured debts. This excludes any debts which involve a collateral, like auto loans and mortgages, so if those are your major debts, debt management might not be able to help.
However, if you’re primarily struggling with credit card debt, student loans, or medical bills, which are all unsecured debts, debt consolidation and management might be your best option.
Additionally, DMPs are intended primarily for people who are deeply in debt, so if you’re dealing with low to moderate amounts of debt, a debt management plan likely isn’t worth the hassle or consequences to your credit. In most situations where you’re only moderately in debt, you can “DIY” a debt management plan by setting up your own payment schedule and even communicating with your creditors about possibilities for reducing monthly payments, fees, and interest.
A debt management plan is likely a good choice for you, if
- You have multiple credit cards with balances.
- You’re unable to make your monthly payments on medical or student loan bills.
- You’re deep in debt with no foreseeable resolution.
On the other hand, debt management might not be the best option for you, if
- You’re struggling to make auto loan or mortgage payments.
- You’re moderately in debt.
Benefits of a Debt Management Plan
A debt management plan can help you avoid more serious consequences of debt, like defaulting on your debt or filing for bankruptcy.
Easier Monthly Payments
If you’ve been struggling to pay back your debt on your own, a debt management plan can help you consolidate multiple payments into one, easy-to-remember payment each month.
Debt management can reduce stress by eliminating calls from collection agencies, and it can give you the certainty of knowing when your debt will be completely paid off.
Lower Interest Rates, Payments, and Total Debt
In many circumstances, a debt management plan can even save you money by reducing your interest rates, fees and monthly payment amounts. Your DMP provider may even negotiate with your creditors to reduce the total amount owed in return for faster repayment.
Drawbacks of a Debt Management Plan
Closing Credit Cards
When you enroll in a debt management plan, you will likely be asked to close any existing credit accounts. If you rely on credit cards to stay afloat each month, this can be a difficult process.
Credit Utilization Ratio
Closing those accounts will also negatively affect your credit utilization ratio (how much credit you have available versus how much you are currently using).
Not Paying in Full
Your debt management servicer may negotiate lower monthly payments with your creditors, or even arrange a settlement for less than the full debt owed. While this will lower your debt, it will also show up on your credit score as a debt that wasn’t repaid as initially agreed.
Missing or Late Payments
While you may go into a debt management plan with the best of intentions, the possibility remains that you will find yourself unable to make your planned payments on time. Because your plan will cover many debts at once, a single late payment to your DMP servicer can be reflected on your credit as a missed or late payment to each one of your debt accounts.
Getting the Most Out of Your Debt Management Plan
Debt management is a growing industry in the United States, as more and more Americans find themselves burdened by debt. If you’re falling behind on bill payments, a professional debt management plan is certainly something to consider. However, make sure you get the most out of your debt management plan by knowing what you’re signing up for before signing on the dotted line. Here are some other guides you might find helpful if you are considering a debt management plan
Compare the Best Student Loan Refinance Rates
Here are our top student loan refinance picks for 2019
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Student Debt Relief Loan Refinancing Advertiser Disclosure
College Ave: College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
College Ave Refi Education loans are not currently available to residents of Maine.
1 – The 0.25% auto-pay interest rate reduction applies as long as the borrower or cosigner, if applicable, enrolls in auto-pay and authorizes our loan servicer to automatically deduct your monthly payments from a valid bank account via Automated Clearing House (“ACH”). The rate reduction applies for as long as the monthly payment amount is successfully deducted from the designated bank account and is suspended during periods of forbearance and certain deferments. Variable rates may increase after consummation.
2 – $5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees. Information advertised valid as of 04/26/2019. Variable interest rates may increase after consummation.
3 – This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
ELFI: Subject to credit approval. Terms and conditions apply. To qualify for refinancing or student loans consolidation through ELFI, you must have at least $15,000 in student loan debt and must have earned a bachelor’s degree or higher from an approved post-secondary institution.
LendKey: Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
CommonBond: Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate.
Splash Financial: Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval.com
Earnest: To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest’s fixed-rate loan rates range from 3.89% APR (with autopay) to 7.89% APR (with autopay). Variable rate loan rates range from 2.50% APR (with autopay) to 7.27% APR (with autopay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms of 10 years or less. For loan terms of 10 to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 0.26% and 5.03% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 23, 2019 and are subject to change based on market conditions and borrower eligibility.
Auto Pay Discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/23/19. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice.
Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 303 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, e-mail us at firstname.lastname@example.org, or call 888-601-2801 for more information on our student loan refinance product.