Non-profit credit counselors can be overlooked in an era of for-profit advisory options, including investment firms, personal financial platforms, and a burgeoning number of money management-based mobile apps.
Yet not everyone can afford a financial adviser or even the monthly subscription prices. That’s where non-profit credit counselors and debt management plans come into play.
Debt management plans (DMPs) can be a formidable weapon for financially struggling Americans, and they can only be found at non-profit credit counselors, which means the debt-reduction advice given is focused on a financial consumer’s best interests instead of profit margins. Restricting DMPs to non-profit credit organizations isn’t by government fiat, it’s because creditors and lenders prefer working with credit counselors with no financial skin in the game, which rules out for-profit credit repair and advisory firms.
DMPs are offered by a credit counseling agency that interacts with creditors on your behalf.
“The agency can assist in the lowering of the interest rates, the waiver of the late charges, and the consolidation of your unsecured debt into one monthly payment,” Cal Singh, a credit expert and head of marketing and partnerships at Vancouver-based Equipment Finance Canada, told NTD via email. “You pay that to the agency, and they pay it to your creditors.”
A DMB counselor will review your income, debts, and expenses when you enroll to make sure that the plan is realistic and sustainable. “The plans usually last three to five years, and you have to close your credit accounts, and this may impact your credit in the short term,” Singh said.
Personal debt management plans come with multiple upsides and multiple caveats, and people struggling with excess credit card debt and other household finance burdens should get to know.
“Debt management plans can be a solid tool when someone’s drowning in high-interest credit card debt,” Taylor Kovar, founder and CEO at 11 Financial in Lufkin, Texas, told NTD by email. “They don’t erase the debt, but they give people a way to get control and start moving forward.”
Debt management plans enable consumers to transition from juggling five bills with five due dates and varying interest rates to a single payment and a clear, defined finish line. “That kind of structure can make a huge difference for someone who’s overwhelmed,” Kovar noted.
7 Things to Know About Debt Management Plans
Debt management plans can be a solid tool for individuals struggling with high-interest debt, particularly credit card debt. Here’s how they work and what they offer.
Debt management plans are offered through nonprofit credit counseling agencies
“You start with a free session where they review your income, expenses, and debts,” Kovar said. “If it makes sense, they’ll work with your creditors to bring down interest rates and waive fees.”
Cash-wise, you make one monthly payment to the agency, and they’ll pay your creditors for you. “Most plans last three to five years, and you’ll usually need to stop using credit cards while you're in the program,” Kovar added.
They don’t wreck your credit
Opting for bankruptcy or negotiating debt settlements, debt management plans won’t ruin your credit. Instead, by making regular on-time payments, your credit score will likely rise.
You work with a credentialed debt counselor who offers free financial advice
Working with a non-profit credit counselor offers one-on-one financial counseling sessions, along with a long-term household money management plan that is put into place.
Your payments will be combined into a single monthly payment. Instead of having multiple debt payments to different lenders and creditors, debt management plans offer a single payment made to the credit counseling firm, which disburses the funds to creditors on a monthly basis.
No more collection calls, texts, or emails
Once you start working on a debt management plan with a trusted credit counselor and monthly payments commence, creditors will stop debt collection contacts as long as the payments are made on a regular basis.
No credit card usage
On the downside, debt management plans mean closing your credit cards and putting them out of use. That’s a "tough love" strategy that stops you from adding to your credit card debt until you repay the current card balance. Some exceptions are tied to health or household finance emergencies (such as a car repair to ensure you can continue to get to work, the grocery store, or the doctor).
You must make regular monthly payments on your debt
Under most non-profit credit counselor rules, if you don’t make the regularly scheduled monthly payments, you lose the benefits you gain, including lower interest rates, smaller monthly debt payments, and a clear path to credit restoration.
Your creditor calls the shots and may elect not to participate in your debt management plan
While most credit card companies, mortgage lenders, and other creditors do participate in debt management with credit counselors, not all do so. In most cases, your credit counselor will negotiate lower payments with creditors, and those creditors will likely set the terms and negotiate on their own behalf before agreeing to the lower monthly payments that come with a debt management plan.
Finding a Good Credit Counselor
Your best bet for a good debt management plan is to research and contact debt relief agencies accredited by the National Foundation for Credit Counseling or the Financial Counseling Association of America. They’ll steer you to an experienced and vetted credit counselor for immediate help, especially if your personal finances are in major disrepair.
“Debt Management Plans are one of the best-kept secrets in the world of debt relief,” said Manuel Salazar, chief executive officer at Take Charge America in Phoenix, Arizona, a non-profit credit counseling organization, in a statement. “They’re designed to help consumers regain control of their finances without the long-term financial damage that can come with other strategies.”
Above all, don’t wait for your debt to expand. Chances are that the issue will only worsen if left unaddressed.
“People often wait until they feel completely overwhelmed to ask for help,” Salazar said. “But it’s important to know you don’t have to hit rock bottom. A DMP can be a proactive, empowering step toward financial freedom.”
The views and opinions expressed are those of the interviewees. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. NTD does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. NTD holds no liability for the accuracy or timeliness of the information provided.