Is a Debt Management Plan or Program Right for You?
Households that carry credit card debt owe an average of $8,158, according to a 2017 analysis by LendingTree subsidiary, MagnifyMoney. Paying off that debt can be a difficult process — especially as onerous interest charges accrue over timing, covering up what progress you may be making.
As you try to figure out how to eliminate your debt, you may have seen ads for debt management solutions. They sound promising, some even almost too good to be true. Today we’ll delve in to the concept of debt management programs to help you find out if these offers can legitimately help you dig your way out of credit card debt — or if they might actually make your problems worse.
What is a debt management program?
A true debt management program is created for consumers by credit counseling agencies. When you enroll in a debt management program, you consolidate your payments, but not your debt. You will make one monthly payment to your credit counselor. They will then use that money to pay your various lenders.
Your counselor will also try to work with your lenders to negotiate interest rates and fees associated with your debt. The idea is that by lowering interest rates and eliminating fees, more of your monthly payment will go towards the principal amount you owe, allowing you to pay off your debt at faster clip.
Is a debt management program right for me?
Bruce McClary, vice president of communications at the National Foundation for Credit Counseling (NFCC), cautions that debt management programs aren’t for everyone.
For starters, you need to have sufficient income to be able to make payments on your debts. Those who do not have any income and are unable to change their situation to a point where they could bring in more money would not benefit from a debt management program, he tells LendingTree.
“It’s not likely that they’d be able to successfully complete the program over four to five years to pay off their debt,” he said. “It’s unrealistic.”
On the other side of the coin, there are also people whose debt situations may not be so tenuous as to require the total services of a credit counseling firm. In that case, these consumers may feel like their situation is more dire than necessary because they are afraid to track their budget, expenses, and debt obligations properly. Even so, nonprofit credit counseling firms can still help, as they start everyone off with an initial financial review to assess the damage.
“We see that a lot,” McClary said. “They’re much better off than they imagined. They can adjust and handle it on their own.”
Who should get on a debt management plan, then?
While you should complete the financial review with your credit counseling agency to get personalized advice, in general, those who bring in an income but are struggling to meet minimum monthly payments on their debts are candidates for debt management programs.
McClary says these debts must be unsecured, meaning there is no collateral backing them. Credit card debt, signature loans, and personal lines of credit are all examples of unsecured debt. Things like mortgages, which are secured by your home, and auto loans, which are secured by your vehicle, do not qualify.
Benefits of a debt management program
There are many benefits of using a debt management program. For one, you may be able to pay back your debt more quickly with your credit counselor negotiating lower interest rates and fees. When your interest rates are lower, that means more of the money you throw at your debt each month will be applied to the principal—the total amount you owe before interest and fees.
Debt management programs may also help you avoid bankruptcy, reduce the amount of calls you receive from creditors, and potentially improve your credit score as you work within a realistic budget to pay all of your bills on time.
What to expect when enrolled in a debt management program
Before you can enter a debt management program with a nonprofit credit counseling agency, you must complete a full financial review with a counselor. You may be directed toward a debt management plan, or your counselor may see one of their other programs as a better fit.
McClary says some agencies may charge a fee for this initial session, though it is not a universal practice.
If you do enroll in a debt management program, you will have to pay an enrollment fee, which McClary says is typically somewhere between $25 to $35. He relays that the average monthly fee for a debt management program falls in this same range.
Once you’re on the program, you can expect to be on it for four to five years, which McClary points out is considerably shorter than the 15 years it would take most people to pay off their credit card debt while making only minimum payments. If four to five years sounds like a long time, he reminds debtors that they can contribute more in order to pay off their debt faster.
“They can feel free to pay more than the minimum required monthly payment to accelerate the process so they’re not in it five years,” he explained.
What to watch out for: Debt relief firms
It’s important to note that debt relief firms are not the same as credit counselors. While there are a few reputable debt relief firms, it’s an industry that’s known to be predatory.
Debt relief firms will attempt to negotiate the amount of debt you owe rather than interest rates and fees. Typically this is done by withholding payments from the creditors until they agree to the reduction. Some lenders will not work with debt relief firms, and—worse yet—during the time period when you’re not paying your debts, all of those missed payments could be reported to the credit bureaus, further damaging your credit history.
You also want to be on alert for credit counseling agencies that operate as for-profit organizations. They are not required to follow the same standards as nonprofit agencies, according to McClary.
“There is a mandate to provide financial education for nonprofits,” he said. “You won’t find that with a for-profit credit counseling agency. If you do, it’s rare.”
When your counselor looks at your situation holistically and provides financial education alongside your debt management program, it makes a difference. A 2016 study conducted by The Ohio State University evaluated the effectiveness of “Sharpen Your Financial Focus” — one of the NFCC’s educational programs. Those who were enrolled in the program decreased their revolving debt by $2,600 more than those who were not enrolled over an 18-month period, and reduced their overall debt by $7,600 more than those same peers.
How does a debt management plan affect my credit?
The fact that you are working with a credit counselor will not show up on your credit report unless your lender chooses to report the fact to the credit bureaus, but it will not impact your credit score.
In fact, if you are faithfully making your payments, you may see your credit score improve. That has nothing to do with your involvement with a debt management program; rather, it is based on your proven track record of paying your debts on time.
Can I still use my credit card while on a debt management program?
No. As a part of your onboarding agreement, you will have to agree to not add to your current balance or open new credit card accounts.
“This creates level playing field,” McCrary explained. “When creditors are paid through a debt management program, you can’t make arrangements with other creditors. The goal is to get to debt-free, and you can’t do that by racking up more debt.”
How long is this process?
McClary says most consumers complete a debt management program within four to five years.
Do I have to include all my bills in my debt management program?
No. As a matter of fact, there are certain bills you won’t be able to include in your debt management program. Unsecured debts can be included in your debt management plan. McClary says credit counselors most often see credit card debt, but clients can also include:
- Medical bills
- Fixed-term loans
- Signature loans
- Personal loans
- Debt owned or managed by third-party collection agencies
He says that this last situation is less common, but collection agencies may own debt that you owe for being late on your utility bills or other monthly obligations.
You cannot include secured debt, which is anything with collateral behind it. That includes:
- Auto loans
- Any other loans where the lender holds the title
You also cannot include bills that have landed you in court. If a judge ruled against you and you are paying through wage garnishment, a debt management program is not going to help you.
“Talk to a nonprofit credit counselor before things get that bad,” McClary said. “When you come in earlier, we can offer you a wider range of options.”
How does a debt management program affect interest on my credit accounts?
Your credit counselor will attempt to negotiate a lower interest rate with your creditor. If they are successful, you will see your interest rates go down.
What fees are associated with debt management programs?
You may have to pay a fee for your initial consultation with a credit counselor. You will also have to pay a fee to set up your debt management program, and then pay a monthly fee for the duration.
McClary says these fees average between $25-$35, though they will vary.
You should shop around for your program, and keep in mind that each state has a set maximum fee nonprofit credit counseling agencies are allowed to charge.
Can I obtain a mortgage while I’m on a debt management program?
Yes. In fact, being on a debt management program may help make your dream of homeownership a reality, as it can help you lower your debt and improve your credit.
“When I was a counselor,” McClary recounted, “I remember a number of times people came in, and their credit was a mess when they started. They were behind on all their bills and needed to get back on track. Two years into the program, their credit scores had improved. What was impossible at the beginning was now possible.”
He said these clients did have to discuss the debt management program with their prospective lenders as it showed up on their credit reports.
What are some alternative options?
If you cannot get on a debt management program to help you tackle your unsecured debts, McClary recommends turning to a credit union or a bank with which you have a history. Even if they have turned you away for traditional banking products, when you explain your situation, they may be able to offer some solutions, such as a debt consolidation loan.
He notes that unfortunately, payday loans — with interest rates upwards of 400% APY — often fill the gap for those who have nowhere else to turn. If you find yourself in this situation, you may want to explore FinTech solutions that can help you make it until payday with automated, zero-percent interest loans, like Even or Earnin.
How do I choose the best debt management program?
Because of the proven success of educational programs in tandem with debt management programs, McClary stresses that while you should certainly compare fees, you need to look deeper than just the numbers.
“You can look at a grid on a website,” he said. “You can write down some figures, do the math and compare apples to apples. But it goes a lot further than that. It’s about the services.”
To vet a company for the quality of its services, he recommends looking for the NFCC and Council on Accreditation (COA) symbols on their website. COA is an independent agency that runs audits on credit counseling agencies.
If it has those certifications, you can start digging deeper. McClary says most nonprofit credit counseling agencies are registered with the Better Business Bureau. He cites this as the best place to check for complaints, resolutions, and overall customer satisfaction with the agency’s services.
He also advises checking what pops up when you search their name in the “News” section of Google search. He says that sometimes pending lawsuits or investigations will show up here before allegations appear on popular review sites.