Pros and Cons of Debt Management Plans
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If you are burdened with your debts, you are not alone. The average American has over $ 90,000 in debt, including credit cards, student loans, and personal loans. If you’re struggling to pay off your balances, one option is to work with a nonprofit credit counseling agency and sign up for a debt management plan. With this approach, you can pay off your debts in five years or less and get other help managing your money. However, debt management plans are not for everyone and there are some downsides to be aware of. Here’s what you need to know.
Key points to remember
- Debt management plans allow you to pay off your debt in five years or less.
- To start a debt management plan, you need to work with a nonprofit credit counseling agency.
- There may be a registration and maintenance fee to participate in a debt management plan.
- Debt management plans only address unsecured forms of debt, like most credit cards.
What is a Debt Management Plan?
When you sign up for a debt management plan, you are working with a nonprofit organization credit counseling agency. Your advisor will contact your creditors to get their participation and may be able to get them to lower your interest rates, lower your monthly payments, or waive their late fees. An advisor can also help you create a budget, reduce your expenses, and better manage your money.
As part of a debt management plan, you will only make one monthly payment to the credit counseling agency rather than paying your creditors directly. The counseling agency will pay the money to your creditors on your behalf, based on a payment schedule they can agree to.
Debt management plans require uniform monthly payments. They typically take three to five years to complete, and you must agree not to use or take any additional credit during that time. At the end of your debt management plan, your accounts will be fully repaid and you will be debt free.
The pros and cons of debt management plans
Benefits
- Become debt-free within five years: As part of a debt management plan, you typically pay off all of your existing accounts within five years.
- Simplify your payments: Instead of having multiple payments and due dates to remember, you’ll only make one payment to the credit counseling agency. One payment can make managing your money easier.
- Improve Your Credit Score: As you begin to make payments under the debt management plan, you can gradually improve your credit score.
The inconvenients
- Lose access to credit cards: To make sure you don’t accumulate additional debt, credit counseling agencies will ask you to stop using or even close your existing credit cards. In the future, you will only depend on cash and debit cards until your debt is paid off.
- Unable to open new lines of credit: When you are enrolled in a debt management plan, you cannot open new lines of credit, so you cannot use an auto loan to buy a car or a personal loan to renovate your home.
- Creditors cannot participate: Not all creditors will agree to participate in a debt management plan. If creditors refuse to be included, the plan will be less effective.
3 credit counseling agencies to consider
There are many active credit counseling agencies. While there are generally registration and maintenance fees, some agencies will waive these fees in certain circumstances.
Below are three nonprofit credit counseling agencies that offer debt management plans in all 50 states:
Keep in mind that scammers sometimes pose as legitimate credit counselors. When evaluating potential agencies, make sure they are non-profit organizations. It is also a good idea to check each of the ones you are considering with your state attorney general and / or your local consumer protection agency. the United States Trustee Program also has a list of agencies that may be right for you.
Alternatives to Debt Management Plans
While debt management plans can be effective tools for paying off your debt, they are not always the best strategy. For example, secured debts and student loans are not eligible for debt management plans, and credit counseling agencies may cap the amount of debt you may have to participate in one.
If a debt management plan isn’t right for you, consider these alternative strategies:
- Debt Consolidation: With debt consolidation, you take out a personal loan and use it to pay off your existing accounts. With a lower interest rate and fixed monthly payments, a debt consolidation loan can help you save money and speed up your refund.
- Debt Settlement: Debt settlement is a risky strategy where you stop making payments in the hope that your creditors will settle for a lower amount.
- Bankruptcy: If your debt is more than you can realistically repay, file bankruptcy can remove your obligation to repay all of this. However, bankruptcy will stay on your credit reports for seven or ten years, depending on the type of bankruptcy, and it will be difficult for you to borrow in the future.
If you’re not sure which approach is best for your situation, contact a nonprofit credit counseling agency and talk to an advisor about your options.
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