5 ways to derail your debt management plan
By Nick DiUlio
February 6, 2014
A debt management plan (DMP) can be a much-needed helping hand to many who can't manage their debts on their own.
With a nonprofit credit counseling agency's help, a DMP allows you to pay down a multitude of debts within five years with a single monthly payment (which the counselor distributes to those you owe). Counselors can sometimes even negotiate with your creditors to lower your interest rate.
But DMPs can be a challenging road to walk, and they're not for everybody.
“I would say only about 15 percent of the consumers who contact us can benefit from a debt management plan,” says Christopher Viale, president and CEO of Cambridge Credit Counseling in Massachusetts. “The rest either don't have sufficient income to repay their debts or need to explore other options.”
These five things could make you a bad fit for a DMP — or derail yours after you've started.
1. You don't have enough income
A debt management plan is a fairly simple concept. You pay the counseling service, and they pay your creditors.
However, the arrangement is incumbent upon having enough income to make regular monthly payments and, according to Jana Castanon, spokeswoman for the Ohio-based credit counseling service Apprisen, insufficient income (or no income at all) is the biggest barrier for potential DMP clients.
“We encounter a lot of individuals who are not only severely in debt, but who have also fallen on hard times and simply don't have the money to pay down their debts,” Castanon says.
If you don't make enough money, the credit counseling agency won't just send you away.
“We help [clients] at least prioritize their debt and offer a variety of community resources to supplement their income while getting back on their feet,” Castanon says. “Then, in the future, they may become a good candidate for a DMP.”
2. Your creditor won't allow your account into the DMP
There are a few rare instances when a creditor may not agree to the terms of a debt management plan, according to Katie Moore, financial counselor at GreenPath Debt Solutions.
“I can't think of too many reasons why this would happen, but it does come up from time to time,” says Moore. “Maybe you've been in a DMP before and that looks like a red flag to a certain creditor. But we always cover these potential variables during the initial interview process and it's not something worth stressing about too much.”
According to Thomas Nitzsche, spokesman for ClearPoint Credit Counseling Solutions, when a creditor refers to an account as being “ineligible for a DMP,” that typically means it won't accept a revised payment plan with a credit counseling service; it doesn't mean the counselor can't help. The counselor may still be able to manage the account on your behalf and send payments to the creditor.
“Just because one of your accounts is ineligible doesn't mean you're without hope,” Nitzsche says.
3. You have the wrong kind of debt
Debt management plans are designed to handle only unsecured debts, such as credit cards, medical bills or payday loans. If you're struggling with secured debts, such as a mortgage or car loan, a DMP may not be the answer. Nonetheless, credit counseling may be helpful.
A credit counseling agency may offer additional programs designed to help you pay down secured debts, says Scott Laughlin, director of community and creditor relations for Consumer Credit Counseling Service of Buffalo. While the agency may not list these accounts on your DMP, they may still work with those creditors to obtain a more manageable resolution. What's more, many credit counseling agencies work with the Department of Housing and Urban Development (HUD) to make mortgage help available to homeowners.
“If a client comes to us, we look at everything he or she has going on, which means we'll take a look at payment options on secured debts as well as figure out how to manage the unsecured debts,” says Laughlin. “Mortgage lenders can be challenging to work with, but they all have departments designed to help people who are in over their heads.”
4. You can't live without credit cards
For a DMP to be successful, you can't continue to grow your debt, meaning accounts listed on the DMP must be frozen so you can't use them while the plan is in effect. That said, there are possible exceptions to these strict guidelines.
“We understand — and creditors understand — that hotels need to be booked, cars need to be rented and some purchases need to be made online, which means you may need to hold on to an active credit card even while you're in the DMP,” Laughlin says. “We handle each situation individually and work with whatever extenuating circumstances you may have.”
For instance, it would be unrealistic for a business owner to go five years without any credit cards, Moore says, and so counseling services will often make exceptions. But that doesn't give you an excuse to continue racking up superfluous debt.
“We talk to every client about keeping a line of credit open for emergencies and such, and it's fairly common that people will leave one card off the DMP,” says Moore. “But if you come to me and say you want to keep your Macy's card open, then I'll tell you that you're missing the point.”
5. You take on more debt
Even if you keep a card open, the last thing you want to do is rack up more debt or open new accounts while enrolled in a DMP. This is not only self-defeating, but can also result in a creditor dropping your account from the program.
Nonetheless, Laughlin says, individuals need to be honest with their credit counselors and notify them right away if they take on additional debt. The sooner they do, the better the chances that the agency will be able to include those new accounts in the management plan.
“Don't think that the automatic response is for us to hate you for doing this,” says Laughlin. “We're here to help you improve and increase your financial capabilities, not scold you.”
If you try to hide your new debt or cards, your counselor may learn of them anyway if they're reviewing your credit report. Or a creditor may notify them.
“However they find out, both the agency and the creditor want to help you move a step forward, not take two steps back,” Laughlin says.
Don't derail the DMP
Even if you are the perfect DMP candidate, credit counselors caution against these common debt management mistakes:
Late payments: It may seem like an obvious piece of advice, but Laughlin says it's often one of the most frequently neglected.
“You may only get one shot at this since many of the largest creditors are only allowed to offer one long-term debt management plan and this might be it,” says Laughlin. “If you do miss a payment or default on the DMP, we can still help with restructuring your budget or trying to assist and manage those accounts with collections. We can still help, but it may not be as smooth and simple as if you paid on time.”
Failing to make a budget: According to Viale, the biggest reason people don't succeed in a DMP is because they fail to design a budget that addresses poor financial habits.
“I see this all too often,” says Viale. “As much as you walk them down to the river to drink the water, some people never succeed. They continue using their credit cards to handle expenses throughout the year and fail to make substantial changes to their financial behaviors.”
Not listening to your counselor: Some of the changes a counselor asks you to make may be uncomfortable, but try to follow his or her advice.
“And you need to stay in constant contact,” Castanon says. “Think of a DMP like a marriage between the agency and the client. When the client no longer communicates with us, that's when things start to spin out of control.”