Debt Management Plans: How to Make Them Work for You

Debt Management Plans

Debt management plans sound like a great idea for digging yourself out of debt – until you realize that it can affect your credit in negative ways. Depending on how you go about involving yourself in a debt management plan will determine how your credit fares in the long run.

Let’s talk about what debt management plans actually are. Debt management plans are usually offered through a credit counseling service or agency. You typically don’t need one until you’re actually deep into debt, although the sooner you catch yourself, the better off you’ll be.

Who You Pay on Debt Management Plans

With debt management plans, you don’t pay directly to your creditors anymore. Once you sign up with the credit counseling service, you start making lump sum payments to them. They in turn take these payments and divide them between the people or companies you owe. This way, you pay off each debt a little at a time so that each creditor knows they’re getting paid.

Now, when you’re on a debt management plan through a company, you will have to cease making payments for a couple months. That means you’ll probably be contacted by either the creditors or a collection agency – or both. Debt management plans aren’t the cure-all, and creditors aren’t their biggest fans.

How long do debt management plans take to fulfill your debts? It depends, of course, on how much debt you have to repay. In general, it may take anywhere from several months to five years to pay back your debt on debt management plans.

However, if you’re on debt management plans offered through a debt negotiation service, which also sometimes acts as a credit counseling agency, that time might be slashed in half. If you get your debts negotiated down to a more reasonable number, such as only 25%-40% of your original debt, you’ll be able to get off debt management plans that much more quickly.

How to Work with Debt Management Plans

But credit experts warn about the consequences of going through debt management plans. First of all, some people fall into the trap of thinking that debt management plans magically solve all of their debt problems. This is a fallacy.

Let’s take a look at what you have to do on debt management plans. You must make monthly payments. You must cut back on your current spending habits. You should try to make more money in order to pay those debts off quicker.

The other reason – and it’s a big one – that you should hurry up and pay off your debt is that it debt management plans negatively impact your credit score. Late payments – or no payments at all – show up on your credit score so that anyone who checks it can see your credit history and notice that you haven’t been too frugal with your spending habits.

Financial advisor Dave Ramsey warns that debt management plans won’t work unless you change your mentality. That mentality should be to desire to pay off your debt and to take active steps to make that happen. That might mean finding a new job. It might mean cutting back on the amount of times you go to the movie theater each month. It might even mean canceling your golf membership.

For debt management plans to work, your mentality must be such that you place any extra finances you receive toward your debt. And remember, you can make more than just the minimum monthly payment on debt management plans – or any debt payment, for that matter. The quicker you can get those paid off, the better off your credit score – and your stress level – will be.

You should also show your financial responsibility when on debt management plans. That means that when you make your monthly payments, they should always be on time. After all, you’re trying to keep your creditors happy and keep them from suing you. The best way to make them happy is to at least pay them on time.

Obviously, you should choose your credit counseling service responsibly, too. That means asking questions and doing research into the company’s history before signing up for any debt management plans. Look for customer reviews, state licensing and overall reputation. Ask about hidden fees, and don’t naively trust them when they say they’re a “non-profit” credit counseling service.

When you make your financial situation, mentality and debt management plans work together, you’ll successfully reap the rewards of a debt-free life. But don’t dally if you’ve made up your mind to do it. The longer you delay your payments to your creditors, the worse your credit score will get. Although your credit score won’t look too good on debt management plans, either, it will still behoove you to take action sooner rather than later.

Don’t forget that your credit counseling service needs to get paid, too. Factor in any fees into the total cost of your debt before signing up for any debt management plans.

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