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Debt Management Plans: A Roadmap To Financial Freedom

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According to the Federal Reserve Bank of New York, credit card debt in the U.S. hit a new high of $1.14 trillion. And while struggling to pay down unsecured debt like credit card balances or personal loans is a common plight for many of us, it doesn’t have to be a permanent burden.

Debt management plans (DMPs) are a valuable tool for helping individuals overcome debt—and the financial and emotional toll it creates—and achieve financial freedom. In this guide, you’ll learn what DMPs are, how they work and how they can benefit you. You’ll also discover the role of credit counseling agencies in administering DMPs and whether debt consolidation loans might be a better option.

Debt management plans (DMPs) are structured repayment programs administered by credit counseling agencies—nonprofit organizations that offer financial advice and help consumers pay back their debts. Instead of paying down multiple sources of debt, a DMP only requires you to make a single monthly payment to your credit counseling agency, which then pays your creditors.

DMPs are a strategic approach to paying down debt that avoids interest-bearing consolidation loans. Generally, DMPs only involve unsecured debt such as credit cards, personal loans and medical bills. Mortgages and collateralized debt cannot be part of a plan.

DMPs are structured to pay off your outstanding debts within five years, though this can vary from person to person. While enrolled in a DMP, adhering to your program and avoiding additional credit lines or missed payments is crucial. Doing so could prevent you from attaining financial well-being or jeopardize your DMP entirely.

First, you’ll need to set up a credit counseling session with a certified counselor from a reliable credit counseling agency. During this session, the counselor will assess your financial situation and DMP eligibility based on the following factors:

If you’re deemed eligible for a DMP, you’ll have the option to enroll. If you decide to move forward, your credit counseling agency will:

During your debt management plan, your agency will typically:

Debt management plans cover unsecured debts—but not certain types of loans and secured debts that leverage personal property as collateral. If you have large amounts of secured debt to pay off, a credit counseling agency can still advise on payment management. If your secured debt is insurmountable, you might want to consider bankruptcy.

DMPs are ideal for consumers with extensive credit card or other unsecured debt they can’t overcome. Here are the four biggest benefits of enrolling in a DMP.

A DMP consolidates all your unsecured credit payments into a single monthly statement. This makes it much more manageable than juggling multiple statements and payments to different creditors. Instead of setting up multiple bank payees or transfers, you only need to send one payment to your credit counseling agency. “This reduces the likelihood of missed payments, which can otherwise lead to additional fees or further damage to one’s credit score,” Josh Richner, founder of FaithWorks Financial, tells SUCCESS.

Your counselor negotiates with your creditors at the beginning of your DMP to get you better rates and lower fees. This can free up your budget for other expenses not covered under a DMP, such as mortgage payments or secured loans.

Missed payments, ballooning debt and a low percentage of available credit can quickly erode your credit score and limit your financial opportunities. A DMP can help you pay on time and sustainably tackle your debt over the long term. A DMP can even help you avoid bankruptcy—especially if you’re grappling with a mountain of unsecured debt.

In addition to setting up a budget and financial plan at the beginning of your DMP, credit counseling agencies provide continuous financial advice. Some offer free workshops and courses on topics like improving credit scores and budgeting basics.

Credit counseling agencies are typically nonprofit organizations that offer credit counseling, debt consolidation, budgeting and money management services. They function like financial advisors with a focus on consumer debt. In addition to these services, many credit counseling agencies offer free workshops and webinars to help you stay on the right path.

When selecting an agency or agent, it’s also important to check their credentials and ensure that they’re legitimate—and that you and your assets are protected during this vulnerable process.

Credit counseling agencies can help improve your financial situation, but you should be sure you’re working with a reputable, accredited organization. This means making sure they’re certified by the proper governing bodies.

According to Michael Sullivan, a personal finance consultant with Take Charge America, “There are two membership organizations that can provide referrals. The NFCC (National Foundation for Credit Counseling) and FCAA (Financial Counseling Association of America).” The NFCC website can direct you to accredited agencies, while the FCAA can help you find individual credit counselors certified in your state.

You can also cross-check your choices with your state’s Attorney General, Consumer Protection Agency or Better Business Bureau (BBB).

Debt consolidation loans are separate from DMPs. While both options consolidate your debt into a single payment, a debt consolidation loan involves taking out a new loan—usually at a lower interest rate—to pay off your unsecured debt all at once.

The core benefit of a debt consolidation loan is a single payment at a reduced interest rate. “When shopping for a loan to reduce your debt,” credit coach Jeanne Kelly tells SUCCESS, “it’s important to find one with a favorable interest rate. Start by checking with your local bank or credit union, as they often offer competitive terms.”

When choosing a lender, Kelly adds that you should “thoroughly research any lender before sharing your personal information to ensure you’re choosing a trustworthy option with the best possible terms.”

That said, rates are also part of a bigger picture. Richner says consumers need to also take loan fees into account. “Look beyond just the interest rate. Pay attention to loan fees, the length of the loan term, and any early repayment penalties as these can greatly impact the loan’s overall cost.”

There are a number of factors that influence the interest rate offered by lenders, but your credit score is the most important, according to Equifax. It recommends borrowers with credit scores under 670 consider other consolidation options, as they might not find favorable interest rates. Securing the lowest possible interest rate is crucial, as your rate impacts how quickly you can satisfy your loan and how much you pay over the principal.

Debt management plans offer consumers straightforward repayment terms, plus ongoing guidance and support. If you’re struggling with multiple sources of high-interest debt, consult a certified credit counseling agency to explore your options—even if you don’t enroll in a DMP.

Use the links above to find an accredited, reputable agency before reaching out, and be sure you’re comfortable with their approach. Selecting the right agency is crucial as the relationship will likely last for several years. If you find the right agency and stay the course, you’ll be well on your way to financial freedom.

Photo courtesy of fizkes/Shutterstock

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