Managing debt can be overwhelming. At times, it can seem as if you’ll never dig out from under the pile of bills. If you decide to work with a certified credit counselor, one of the options that will likely be presented to you is a debt management plan. Here’s what you need to know.
1. A debt management plan is not the same as debt settlement
A debt management plan is usually offered by credit counseling agencies to consumers having difficulty paying their debt. Credit card debt, bank overdraft balances, and medical debt are just some of the debts you can have included in the plan. The purpose of a debt management plan is to help you pay down the debt owed to your lender. This is not the same as debt settlement, where you pay less than the agreed upon amount.
By participating in a debt management program, your lender might reduce or waive finance charges or fees. This way, you can pay off your debt faster. It takes roughly three to five years to complete the program.
2. Payments are made to a third party
One of the most frustrating parts of being in debt is managing several payments simultaneously. A benefit of participating in a debt management plan is that you won’t have to worry about juggling payments. Each month, you’ll make one payment to a credit counseling agency. Once the payment is made, the agency then transfers the payment to your creditors.
3. A debt management plan could have a negative impact
A debt management plan could have a negative impact on lending decisions. This is because information on your report could change to reflect that you’re participating in this program. Some lenders or potential landlords might be hesitant to consider you for a loan or apartment because this is a sign you’ve struggled with your finances. You should also know that creditors could report you’re participating in a debt management plan and not paying back the loan as agreed.
4. A debt management plan might not be right for you
Not every situation is a good fit for a debt management plan. Depending on your debt, you might not qualify. For example, student loans, child support, and tax bills can’t be included in one of these plans. When it comes to student loans, it’s best to call your loan servicer and explore payment alternatives such as income-based repayment. For taxes, you can call the IRS and see if you’re eligible for a monthly payment plan.
5. Be careful about the agency you use to help you manage debt
Take time to research the credit counseling agency before committing to a debt management plan. Not all agencies are created equal. Search for a nonprofit agency that is a member of either the National Foundation for Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA). Member agencies are required to adhere to strict standards established by the Council on Accreditation or another approved organization. Furthermore, credit counselors must participate in a certification program.
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