What is Debt Management?

Debt management is a way to organize your credit card payments in a way that makes them more viable and streamlined with your income and expenses. If you use credit cards often but fail to make more than the minimum monthly payment, you may find it difficult to pay off your balance. Sooner or later, your personal finances will take a blow. Debt management is an option that lets you put your finances back in order by providing you with a way to pay off your debt with a structured time plan.

What Is a Debt Management Plan (DMP)?

A debt management plan (DMP) is a type of debt relief that establishes how much a person makes, how they spend their money, and how much balance is left for sustained credit card payments. DPMs are usually designed for repaying credit card debt within 3 to 5 years.

Some people settle for DIY debt management plans. If you lack the self-discipline or need expert and professional advice, a debt management professional can help you pay off debt and organize your finances in a way that fits your needs.

Credit counseling agencies facilitate the negotiations with your bank or other creditors and create a detailed repayment plan that consolidates multiple debts into a single monthly payment, without taking a debt consolidation loan. In many cases, debt management programs involve a lower interest rate, a lower monthly payment, an extended repayment period, and sometimes even waiving fees.

How a DMP Works

Assessment

The process begins with an assessment of the debtor's financial situation, including income, expenses, and the total amount of debt owed. The goal is to establish a realistic sum of money that can be consistently dedicated to debt repayment.

Negotiation

The credit counselor will negotiate with creditors to lower the interest rate, waive fees, and establish affordable payment terms. The point of working with a credit counselor for debt management is that they have the experience, know-how, and expertise to negotiate on your behalf and achieve the best result for your finances.

Repayment Plan

A structured repayment plan is created. It consolidates all debts into one monthly payment made to the counseling organization, which then distributes the funds to creditors.

Ongoing Support

Throughout the plan, which typically lasts three to five years, the counseling agency provides ongoing support and financial education to help debtors manage their finances effectively. The goal is to help you stay financially responsible so you won’t need debt management or any other type of debt help in the future.

Pros of Debt Management

Simplified Payments

Consolidating multiple debts into a single monthly payment makes it easier to manage debt and keep track of payments. It helps you organize your finances and expenses so that the debt gets repaid in full and on time. That’s how you can maintain your credit score and improve your credit history.

Reduced Interest Rates

A credit counseling agency can negotiate lower interest rates, which can lead to significant savings over time. Even a small decrease in the interest rate adds up to important savings over 3 to 5 years of payments.

Fee Waivers

Some creditors may agree to waive late fees and other penalties, which further reduces the overall debt burden.

Financial Education

Debtors receive financial education and support. They can develop better money management habits so they have sound finances in the future.

Credit Score Protection

Properly managed, a debt management plan can help protect and eventually improve the debtor's credit scoring over time. When debtors keep up with payments, this will reflect positively on their credit scores.

Cons of Debt Management

Commitment Required

The debtor must commit to the repayment plan for several years, usually 3 to 5, which requires discipline and consistency. For the foreseeable future, you will have to make regular payments toward your debt.

Impact on Credit

Enrollment in a debt management plan may be noted on your credit report and potentially affect your credit score in the short term. However, as you keep paying off debt, your credit score will soon recover. Compared to other debt-relief options, debt management hurts your credit score slightly more than debt consolidation loans but far less than debt settlement.

Fees

Credit counseling agencies may charge a setup fee and a monthly fee for their services, which could add to your expenses.

Limited Access to Credit

While in a debt management plan, access to new credit may be restricted. In most cases, you will be required to close your credit cards so you don’t get into more debt. You may also find it hard to get an auto loan or other types of unsecured loans.

Who Benefits from Debt Management

Individuals with Multiple Debts

People who can’t handle multiple debts, struggle with high interest rates, and fear that a debt collection company will come to their door soon, can benefit greatly from the simplified, consolidated payments. It makes things straightforward and streamlines the repayment process with a single payment that’s easy to remember and pencil down in the monthly expenses.

Note that only unsecured debts can become part of a debt management plan — secured debts, such as mortgage loans, are excluded.

Businesses with Cash Flow Issues

Small businesses facing mounting debt can use debt management to get their payments in order and regain financial stability. It can also help with the business's cash flow. Managing debt properly can free up cash by reducing interest expenses and restructuring payment schedules, thereby providing more working capital for day-to-day operations.

Those Looking to Avoid Bankruptcy

Individuals or businesses looking for alternatives to bankruptcy, which can have more severe long-term consequences, may find debt management a viable solution. This is especially the case if they can afford to repay their debt and only need to reorganize their finances and exercise better financial discipline.

People Needing Financial Guidance

Debtors who need support and education in financial management can benefit from the counseling and resources provided by debt management companies. Many people find it hard to understand incomes and expenses. Many are also prone to impulse buying, which can pile up after a while. Understanding and disciplining your financial habits can improve your financial situation.

Debt Management in Steps

1. Initial Consultation

The process begins with an initial consultation with a credit counseling agency. During this session, a certified credit counselor assesses the debtor’s financial situation, including their income, expenses, and total debt.

2. Budget Creation

The counselor works with the debtor to create a budget that outlines in detail all sources of income and expenses. This helps identify how much money can be allocated toward debt repayment each month. It’s a realistic approach that takes into account the standard of living and everyday necessities.

3. Debt Analysis

The debtor provides a complete list of their debts, including credit cards, student loans, personal loans, medical bills, and any other unsecured debts. The counselor reviews these debts to understand the total amount owed and the interest rates being charged. The goal is to repay them on more favorable terms and within an extended repayment period.

4. Negotiation with Creditors

The credit counseling agency contacts the debtor’s creditors to negotiate better terms. This can include reducing credit card interest rates, waiving late fees, and setting up a more affordable payment plan. The ultimate goal is for creditors to get repaid: most of them are willing to make concessions if it means getting their money back.

5. Repayment Plan Proposal

Based on the negotiations, the counselor drafts a debt management plan (DMP) that consolidates all the debtor’s payments into one monthly payment to pay off debt in a realistic way. This plan typically lasts three to five years. Debtors may choose a higher-than-average monthly payment to pay off debt faster.

6. Approval and Enrollment

The debtor reviews the proposed DMP. If they agree to the terms, they sign up for the plan and officially enroll.

7. Monthly Payments

The debtor makes a single monthly payment to the credit counseling agency. This payment covers all the debts included in the DMP. The credit counseling agency takes care of account payments to the creditors.

8. Distribution to Creditors

The credit counseling agency distributes the monthly payment to the creditors according to the agreed-upon terms. They send a monthly report about payments made for records.

9. Ongoing Monitoring and Support

The agency provides ongoing support and monitoring throughout the duration of the DMP. This includes regular check-ins to ensure the debtor is staying on track and making payments on time.

10. Financial Education

Many credit counseling agencies offer additional financial education and financial counseling services to help the debtor develop better money management skills and avoid future debt problems.

11. Plan Completion

Once the debtor completes the repayment plan, any debts included in the DMP are paid off. The agency provides a final review and advice on maintaining financial health.

12. Post-Completion Review

Upon completion of the DMP, the debtor should review their credit report to ensure all debts are marked as paid and that their credit score has improved.

Debt Management as a Financial Tool

Debt management is a supportive approach to pay off different unsecured debts such as credit cards and personal loans that you owe but are struggling to pay off. It comes with significant benefits, particularly for those committed to following through with the plan.

Following a DMP requires a disciplined approach and an understanding of the potential short-term impact on credit and finances. With the help of a credit counseling company, you can get on track and build up a sound financial future.

To find out more about this debt relief option, schedule an appointment with a ClearOne Certified Debt Specialist today at 866-481-1597 and get a free savings estimate along with the full picture of your financial options! An expert counselor will offer all the information you need and guide you through the pros and cons of debt management compared to other debt-relief options.