How Debt Management Plans Work

Understanding how a debt management plan really works, and the difference between debt management and other programs like debt consolidation or settlement, is essential to your success. Without a clear understanding, there is a high risk of going deeper in debt and further injuring your credit.

With a clear plan and a good debt management program (DMP), the benefits are clear, and some of the best-known financial gurus, including Suze Orman, recommend debt management for those who need assistance getting out of debt. Before you sign up with a debt management company make sure you understand each step of the process so you don't end up right back where you started.

What Is a Debt Management Plan (DMP)?

Debt management plans can vary in scope, from simple programs that are basically bill-paying services, to highly useful and interactive plans that help you get control over your debts and negotiate more favorable terms. The level of services needed are dependent upon your level of debt and your ability to make monthly payments. A good debt management company will sit down with you and go through your finances in detail before making any suggestions as to what your debt management plan would entail.

For example, if you have credit card debt and are having trouble making even the minimum monthly payments a good debt management program may consolidate the multiple unsecured debts into a single payment, negotiate with creditors for lower interest rates and waived late fees, and include debt counseling and advice to help you restore your credit and avoid going into debt again in the future.

While the convenience of a single payment is useful, the biggest benefits are the negotiated savings and the potential to restore credit. Before a DMP is put into action the debt management company will use budget calculators to show you whether a DMP can help you and calculate how much you could potentially save based on their existing arrangements with several creditors. Due to new regulations over debt relief companies, providers can longer quote big savings without actually backing it up. This helps consumers guarantee that they aren't being misled before signing up.

Initial Debt Management Consultation

When you first meet with a debt management company, you will go over all your current debts. It is best to have your paperwork in order with all the actual totals and interest rates. This first step may be painful, as you may have to admit you are in over your head. Getting a concrete total on a large debt is often an eye-opening and sobering experience.

Next, the debt management company  will most likely:

• Determine your personal financial goals
• Create a realistic budget to maximize your savings
• Evaluate and explore options to determine the best solution for you

Be prepared for that first meeting. It's surprisingly easy for some bills to slip through the cracks, so make sure you compile all of them. Get a copy of your credit report beforehand, as this may bring to light some debts that you have long forgotten as well as where you can possibly start improving your score.

Negotiations by Your Debt Management Company

According to Consumer Credit Counseling Services, your debt management company will try to negotiate with your creditors to lower your interest rates, take your account out of arrears and reduce your monthly payment. Assuming agreements have been reached with each creditor, the debt management company will work with you to calculate a monthly payment figure that you can afford.

These negotiations not only help to reduce your monthly payment, they can also help restore your credit. Not all creditors will negotiate with debt management companies, but many do. Some even may have existing relationships with certain companies. As such, most debt management companies know exactly how much they can realistically ask for in terms of rate reductions.

Keep in mind that by reducing your monthly payment to all your creditors, it may take years to pay off your debt, depending on how large a debt you carried and what type of agreement your debt management company negotiated on your behalf with your creditors.

One Monthly Payment to the Debt Management Company

Instead of several checks to several creditors, you will now make only one payment to your debt management company. Some debt management companies can even electronically deduct this amount from your bank account. These funds are then distributed to each creditor based on the agreed amount negotiated by the debt management company.

Due Diligence Throughout a Debt Management Program

It is basic common sense, but you must do your due diligence during each stage of a debt management program. Before you sign up with any debt management company, thoroughly research each company you are considering. In addition, the FTC recommends that you read your monthly statements regularly to make sure that the debt management company is following through and paying each of your creditors according to the plan. 

Conditions of Debt Management Plans

Many debt management companies place limits on their clients. For example, once you begin paying the single monthly payment to the debt management company, you may no longer be allowed to use your credit cards. Stopping the use of current credit cards is a common stipulation by the creditor and the debt management company. After all, it is difficult to pay down a debt if you are consistently adding to it. In addition, accruing other debt through additional credit cards is not only prohibited in many debt management agreements, it is just plain inadvisable.

Making your monthly payments on time is crucial. If you don't make payments on time you could lose all progress that has been made, and any negotiated fee waivers or lowered interest rates could be dropped even after a single late payment.

Completion of a Debt Management Program

A sound debt management plan's goal is not only to help you successfully pay off your debts, but also to help you develop strategies for debt management in the future. Some debt management companies encourage customers to call with financial questions or even distribute information for educational purposes.

When you work with a solid debt management company, your continued financial well-being is a primary concern even after you have completed your debt management program and are free from debt.