10 signs you may need a debt management plan
By Allie Johnson
April 13, 2016
Sleepless nights, sky-high interest rates and a phone ringing off the hook with calls from creditors are all signs you might benefit from a debt management plan.
A debt management plan, or DMP, is a way of getting out of debt by working with a nonprofit credit counseling agency, according to the National Foundation for Credit Counseling. The agency negotiates with creditors on your behalf to get you lower interest rates, waived fees and a reprieve from collection calls.
In a DMP, the cards that are part of the plan are closed, and you make one monthly payment to the agency, which then pays your creditors, plus a small monthly fee. If you follow the plan, you should be out of debt within three to five years, according to the NFCC.
HOW A DEBT MANAGEMENT PLAN
AFFECTS YOUR CREDIT
1. Your participation in a DMP will be noted on your credit report for as long as you’re on the plan, she says. The notation won’t be reflected in your credit score but will send a signal to other creditors that you’re trying to get out of debt.
2. When your credit card accounts are closed, which is a requirement of a DMP, your score may go down, she says. That’s because account closures affect your credit utilization ratio, the amount you owe in relation to your total available credit.
The good news: Your credit should improve as you pay down your debt, she says.
Flailing on a sea of debt and unsure how to right your financial ship? “A debt management plan makes a lot of sense,” says Steve Bucci, debt adviser for Bankrate.com and author of “Credit Repair Kit for Dummies.”
Here are 10 signs a DMP might be a good solution to your debt woes:
1. You’re losing sleep over your debt. Some ads for debt management plans suggest you should have about $10,000 in debt to do a DMP, but it’s less about the amount than how you feel about the total you owe, Bucci says. “Having a certain amount of debt makes sense, but it’s not the only criteria,” he says, adding that someone with debts as low as $2,000 might want to do a DMP. “You can have a relatively low amount of debt and still be incredibly stressed over it,” he says.
2. You’re using credit cards to make ends meet. If you pull out the plastic between paychecks to buy medicine or fill the gas tank, this could be a sign you need a DMP, says Melinda Opperman, chief relationship officer for Springboard Nonprofit Consumer Credit Management. “It’s a definite warning sign if you have more month than paycheck,” she says. Some consumers might be able to fix their problem with a credit counseling session and some budgeting help, while others might need a DMP. One upside of a DMP is that closing your card accounts cuts off your ability to rack up more debt, she says.
3. You’re afraid to add up all your debt. “When the fear becomes so great that you don’t even know what you owe, you need to deal with it,” says Mike Sullivan, spokesman for Take Charge America, a nonprofit credit counseling and debt management agency. Many people use denial as a coping strategy when they don’t want to admit they’re using credit to live beyond their means, Opperman says.
4. You’ve got an overwhelming number of cards. If you have so many cards with balances on them that you can’t keep track of payments, that’s also a bad sign, Opperman says. “Some people can become collectors of credit cards, and the balances keep going up, up, up,” she says. In a DMP, the fact that you switch from juggling multiple creditors and due dates to making one monthly payment can make life easier. “Everything becomes manageable and you feel back in control,” she says.
5. Your creditors refuse to work with you. If you’ve tried to talk to your creditors, but you feel they’re not listening to you, or you get shuffled from person to person, or the conversation gets heated, you might want to consider a DMP, Bucci says. Some creditors will “raise the volume and tension” to try to pressure you to pay, Bucci says. In a DMP, the credit counseling agency becomes the intermediary and negotiates with the creditor on your behalf. “Having a cooler head in the middle can help,” he says.
“It’s a definite warning sign if you have more month than paycheck.”
— Melinda Opperman,
Consumer Credit Management
6. Your financial woes aren’t a short-term problem. If you need more than a payment plan that lasts for a few months while you get back on your feet, a DMP might be for you. Some credit card issuers may work with you, offering a few months of reduced payments to help you through a temporary financial hardship. But a DMP can get you lower interest rates for up to five years, Sullivan says. The goal is to help you get out of debt entirely during that time frame.
7. You got hit with a personal crisis on top of your debt. If you got sick, lost your job or were served with divorce papers, you might need a DMP. A hardship piled on top of existing debt can make it harder to deal with creditors you might otherwise be able to handle on your own, Bucci says. A DMP may help to organize your debt and get you back on track. If you have medical bills, they can be included in the DMP if the hospital or doctor is willing to work with the credit counseling agency. “Many of them will,” he says.
8. You’re late on your credit card bills. If you make late payments or are currently late paying a credit card bill, a DMP might help, Bucci says. Even if you haven’t been late so far, but you’re “robbing Peter to pay Paul,” consider making an appointment with a credit counseling agency, he says. One session may help you get back on your financial feet. But if you do need a DMP, it’s better to find out sooner rather than later: “You can often get better terms before you default,” he says.
9. You’ve got sky-high interest rates on your cards. High interest can make it hard to get ahead, especially if you make a late payment and get dinged with a default interest rate. A rate increase can hit your wallet hard because it makes your minimum monthly payment increase, too. On average, credit card interest rates get cut by about half through a DMP, Opperman says.
10. You’re considering bankruptcy. Some consumers are so deep in debt that they need to file bankruptcy. But for others, a DMP can be a good alternative, especially to a Chapter 13 bankruptcy, the type in which you repay all or some of your debt. “If you can do a debt management plan, you might be better served,” Bucci says, as you may do much less damage to your credit than with bankruptcy, Bucci says.
A DMP isn’t for everyone. Some consumers are so deep in debt that they would not be able make the payments required with a DMP, Sullivan says. Others might have too much disposable income to get a DMP approved by their creditors.
In any case, Sullivan suggests making an appointment for a credit counseling session because it’s easy and free. A credit counselor can look at your total financial picture and see if a debt payment method such as the snowball or avalanche could help you get out of your financial hole on your own, Opperman says.
“We look at other options before just recommending someone go on a debt management plan,” she says.