Debt Management

Debt Management Plan: Struggle to Opt for It or Not

A debt management plan commonly known as DMP is a type of repayment method. The debt management plan is structured with the guidance of a credit-counseling agency to help customers manage their debt more efficiently. Debt management allows you to pay the debt more affordably and breaks them into effective payment schedules.

Debt Management Plan generally to borrowers who are unable to pay back their debts based on a review of their finances. The Debt Management Plan specifically covers unsecured loans like credit card bills or medical bills. 

If a borrower is unable to make a monthly credit card or has huge debts then he or she can explore a Debt Management Plan to evade loan defaults or avoid going bankrupt. Such events will harm your credibility in the coming years. In a debt management plan, you are provided with a credit counselor to draft a repayment roadmap and schedule to provide structure to your debt-paying abilities.

Debt Management

Let’s take a hypothetical example: A borrower, Mr. X is struggling with his debts and decides to look for expert advice. Mr. X went to a noted credit-counseling agency. A certified credit counselor reviews Mr. X’s finances and suggests a debt management plan, at a fair monthly service. Further credit counseling agency prepares a new repayment schedule and negotiates with Mr. X’s creditor on his behalf, for a lower interest rate including waiver of certain fees, and a crystal-clear plan to repay the debt in the next five years by providing the exact amount Mr. X needs to pay every month to the agency including service charges.

Now, the credit counseling agency takes the payment and pays to multiple creditors on the behalf of Mr. X. With the disciplined and structured payment system Mr. X can become debt-free in 5 years. 

The above illustration gives us an idea about the working of the debt management plan. Let’s understand the financial practices or habits you have to adapt while entering into the debt management plan.

Debt Management Plan

Some of them are listed below: 

  1. No credit card usage as long as you are in the debt management program Avoid any new credit card obligations while signing up for the debt management plan as it may hamper your concessions you got through the credit-counseling agency 
  2. Be regular and punctual in your payments as one late payment may cost you waiving off concessions and less interest 
  3. You may use the credit card during emergencies but you have to be very clear on this term with your credit card issuers

One should understand a debt management program is only a shield when debt surpasses certain limits. In a debt management plan, your credit report will be examined but its role is very minimum in credit scoring. As your credit payment reduces, your credit score will also improve.

Data and studies show that half of the debt management plan holders do not successfully finish the plans. One must always look for a credit-counseling agency debt management program completion rate.

Debt Management

Source: mackaygoodwin.com.au

One Can Use the Debt Management Plan for Non-Priority Debts Like:

  1. The money took on credit from friends or family
  2. Overdrafts
  3. Personal Loans
  4. Bank or building society loans 
  5. In-store credit debts, home credits, and catalog

One Cannot Use the Debt Management Program to Pay Off Priority Debts Like: 

  1. Income Tax, Insurance, and other taxes
  2. Court Fines
  3. Hire Purchase Agreements for essentials
  4. Child Support and Maintenance
  5. Gas and Electricity Charged
  6. Mortgage Loans, Rent secured against your home  

Advantages of the Debt Management Plan:

The points in favor of the debt management plan are as follows:

Easy Monthly Payment:

The debt management plan allows you to pay a single payment to a credit-counseling agency every month. Further, the debt is paid to multiple creditors via an agency. This helps in managing the payment schedule more efficiently 

Affordable Paybacks:

A credit counseling agency helps you to negotiate with your creditors and often finals the payment on a lower interest rate and get certain charges waived. This ultimately results in reducing overall borrowing costs.

Quick Debt Repayment: 

Most of the debt management plan borrowers can pay off the debt in three to six years. Many Debt Management Plans take a minimum of 4 years. However, if you are not a person who can handle debt payment single-handedly. You must opt for this plan 

Structured and Disciplined Mechanism:

Debt Management Plan’s sole objective is to make timely, regular payments every month to the agency and you must forbid using a credit card or applying for a new credit card during the debt management program going on as it will make the process easier and keeps your payments on track.

Credit Score Improves:

Due to lag in payments, your credit card must hit a certain low, the debt management plan will allow your credit card score to boost steadily. 

Debt Management

Source: jollygoodloans.co.uk

Disadvantages of the Debt Management Plan 

The points against the debt management plan are mentioned below:

Choose Credit-Counseling Agency Wisely:

Beware of fraud agencies to protect yourself from more damage. Fraud agencies may offer you a lower rate of interest or even not transfer your payments to creditors which will negatively impact your credit report and charge you with late fees. It is always wise to choose an agency with utmost caution and at least keep a track of your monthly statements. Always look for credit-counseling agency’s certification from reputed government institutions.  

Not for All Debt’s Management: 

Yes, all sorts of debts are not covered in the debt management plan. The debt management plan does not cover secured debts. However, you can’t be able to receive any help in the case of secured debts

Favorable Repayment Terms: 

There’s no guarantee that a credit counselor will be able to negotiate well and get you the best concessions 

Service Charges Apply:

Service charges may vary from agency to agency but this may put you in an additional burden so always opt wisely and according to financial capabilities 

Late Payments: 

You can’t take a risk of being late when you are involved in the debt management plan, if you do so you might lose benefits like lower interest rate or waived fees. Late payments will impact your credit report badly. 

Debt Management

Source: theweeklytrends.com

Who Provides the Debt Management Plan?

There are many free debt advisers and provide thousands of people with advice. The credit-counseling agency hired highly trained professionals who will be able to solve debt-laden accounts more efficiently. If you are choosing a fee-based provider, you must be aware that all the Debt Management Plan providers should be authorized by the Financial Conduct Authority (FCA) to meet the agreed standards. 

How Does the Debt Management Adviser Help You?

A debt adviser will:

  1. Examine everything you are confident about 
  2. Provide advice about healthy ways to manage your funds
  3. Never make you feel bad about your situation 
  4. Suggest excellent ways of dealing with debt 
  5. Acts as the financial knowledge support 
  6. Always ready to help you with big and small financial steps 
  7. Always try to get the best deals in terms of lesser interest rates and waivers for you 

Substitute to the Debt Management Plan:

The following options can be considered to keep a debt check:  

Debt Settlement: 

The debt settlement company negotiates with the creditors to eliminate some of your debts. This is a good option, debt settlement may hurt your credit score, as you specifically stop making payments to creditors during negotiations which may result in late payments. 

Debt Consolidation: 

Debt Consolidation refers to a consolidated loan or balance transfer credit card to combined existing balances, which ultimately becomes a single monthly payment and specifically at a lower rate of interest. The demerits of this taking a new loan or credit card results in the strict inquiry of your credit report which can dent your credit score temporarily.

Also Read: How To Dig Out Of Debt And Boost Your Savings

Conclusion

A debt management plan is a repayment structure designed by a credit-counseling agency to manage your debts. It requires a single monthly payment and a lower rate of interest most of the time on favorable terms. To make the debt procedure simpler and more efficient. The debt management plan aims at making you debt-free within three to five years.

The debt management plans are worth considering if you are badly debt-laden but again you have to be very disciplined about your finances, spending, and credit card usage habits. However, we have also discussed the substitute to the debt management plan which is debt consolidation and debt settlement but both of them can potentially hamper credit score.

Additionally, if you opt for the debt management plan you have to exercise great caution about different parameters such as be careful and mindful while choosing a credit-counseling agency look for a complete certification agency registered with. Be very open and clear about finances to your debt adviser. Do not completely depend on your credit counseling agency to keep track of your monthly credit card statements. Lastly, be aware and open to the pros and cons of any financial step you are taking.

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