A debt management plan is a long-term program offered by credit counseling organizations designed to pay off the consumer's debt and make sure that creditors receive payment. The Federal Trade Commission and the National Foundation for Credit Counseling point out that a debt management plan isn't always the right solution to get consumers out of debt. However, it's often appropriate for those with a large amount of debt who want to avoid bankruptcy.
Function
A debt management plan is implemented by a credit counseling organization on behalf of the consumer. The consumer is required to deposit a certain amount of money with the organization each month. The organization acts as trustee of the account and uses the funds in the account to pay off the consumer's debts, be they credit card bills, student loans, medical bills, or other types of unsecured debt. A credit counselor will often negotiate with creditors to see if a lower interest rate can be applied to the debt or if late fees and fees for overcharging can be waived.
Effects on Credit
A debt management plan can take a long time to complete. The NFCC indicates that the average time is between three and five years. During this time, the consumer's credit card accounts are either closed or suspended. Often, the consumer will be required to refrain from taking out a loan or applying for another credit card. According to the NFCC, the consumer may use a credit card in specialized circumstances, such as if required to maintain one by an employer.
Credit Scores
An important consideration for consumers who had been making payments toward their debt on a timely basis is how a debt management plan will affect their credit report and credit scores. The NFCC notes that seeking credit counseling won't be reflected on a consumer's credit report. However, if a credit counselor negotiates lower interest debts with creditors, this can affect the type of information that appears on the consumer's credit report while the debt management plan is in place. However, the NFCC notes that once the plan is complete, consumers rarely have difficulty getting new credit.
Successful Debt Management
Consumers should make regular, timely deposits to the credit counseling organization, advises the FTC. Also, consumers should inspect their monthly statements to make sure that creditors are getting paid according to the plan. If the consumer discovers that creditors are not being paid or is unable to make a deposit, the credit counseling organization should be contacted immediately.
Reputable Credit Counseling
A key ingredient to a successful debt management plan is a reputable consumer credit counseling organization. Some organizations may advertise themselves as nonprofit; however, they pocket start-up fees collected from consumers or offer a "voluntary" fee payment plan. The NFCC notes that a reputable credit counseling service applies all initial fees toward the consumer's debt. If a credit counseling agency offers a debt management plan as the only method to reduce debt, the NFCC advises consumers to keep shopping. The FTC notes that consumers should agree to a debt management plan only after a credit counselor has spent a considerable amount of time assessing the consumer's personal financial situation.
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