Debt Management Programs [2024 Guide]
Credit card debt has gradually become a major issue in the US. The average credit card debt in the country is about $7000. Americans, in total, owe about $1 trillion in credit card debt. Younger Americans are also taking on more credit card debt. Nearly 10% of America’s 18-29-year-olds have credit card debt which is due for more than 90 days.
Using a credit card is very convenient. However, making payments can become a challenge for some. Credit cards often come with very high interest rates, which are often expressed in monthly terms. If you work out the annualized rate, then it works out to be one of the highest among all kinds of debts available in the market.
Borrowers who have multiple credit cards with outstanding dues, and those who are struggling to keep up with the payments tend to look for solutions that can lower the burden of monthly payments and make cash flows a bit more manageable. Some of these borrowers tend to look at what is known as a debt management program.
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What is a debt management program?
A debt management program is a payment plan which consolidates various credit card payments into one single payment. Borrowers make one affordable payment to a non-profit credit counseling agency or a debt management company that, in turn, makes the payments to each of the credit card companies.
There is no loan involved in a debt management program. The borrower and the debt management agency pre-decide the tenure of the program, which is generally about 3 to 5 years in duration. The borrower basically gets about 3 to 5 years to pay off the outstanding credit card debt.
The debt management representative or debt counselor works with the borrower and the creditors to work out the ideal amount of monthly payment. This analysis takes into account the borrower’s current financial situation and cash flow patterns. A debt management program generally results in a lower interest rate for the borrower.
In return for the services offered by the debt management company or counseling agency, the borrower has to pay a small one-time initial fee and a small ongoing monthly maintenance fee. After enrolling in a debt management program, creditors will require the borrower to close all his/her credit cards so that no additional debt is incurred.
Advantages of enrolling in a debt management program
Lower interest rates
One of the biggest benefits of enrolling in a debt management program is a substantially lower interest rate. Generally, credit cards have annual interest rates in the mid-twenties and even as high as forty percent. Debt management programs tend to bring that rate down to below 10%.
Simplified payment structure
Instead of making multiple payments to multiple credit card companies, the borrower simply makes one monthly payment to one agency or company. The chances of missing out on a payment or spending too much time tracking the various due dates are eliminated as a result.
An opportunity to improve credit scores
It is true that whenever you close your credit card accounts, your credit scores take a hit in the short run. However, if a borrower makes regular timely payments as per his/her debt management plan, then those transactions get reported and the borrower’s credit report takes the responsible behavior into account. Eventually, credit scores can rise as a result.
No more awkward calls
Once a borrower enrolls in a debt management program and sticks to the plan, the awkward and annoying phone calls from creditors will stop. Having to take such calls when in the presence of family and friends can be quite awkward for anybody. Besides, no one likes to argue over the phone.
Disadvantages of enrolling in a debt management program
Lifestyle adjustment for a few years
Debt management programs are not a short-term solution. They may require the borrower to control his/her spending and adjust his/her lifestyle for 3 to 5 years. The borrower simply cannot afford to miss payments that the debt management programs mandate. So, one is going to be in this for a few years and that requires persistence.
Only unsecured debt is eligible
Debt management programs are only available for unsecured debt like credit card debt. If you are struggling with your car loan, your student loan, or your mortgage, then you have to look for other solutions. The scope of debt management programs is quite narrow in that sense.
Strict terms and conditions
Debt management programs require the borrower to stay on track with monthly payments. There is no flexibility or leeway in making a late payment or deferring it to the next month.
Even if one payment is missed, the reduced interest rates are taken back by the creditors and the entire repayment plan goes for a toss. Debt management programs require serious commitment.
Who is the ideal candidate for a debt management program?
Debt management programs are great for a borrower who:
- Has high-interest rate debt, such as credit card debt.
- Can live without credit cards for a few years.
- Has a stable income, preferably from a stable job, which allows the borrower to make timely repayments.
- Isn’t planning a major purchase like a new home or a new car in the next few years.
Consider the above points and then speak to a non-profit credit counselor to understand where you stand and whether you should go for a debt management program or not.
How to enroll in a debt management program?
The first step is to find out about a debt management service or a nonprofit credit counseling agency that offers such a program. Be sure to read up on the reviews and work only with reputed names. Next, speak to the counselor. You may have to go through an interview.
The purpose of the interview is to understand your financial position, your income patterns, and your spending habits. The counselor may also conduct a soft credit check on you which does not lower your credit score.
Based on a comprehensive analysis, a plan will be chalked out and a budget proposal will be made.
If you agree to enroll in the program, the proposal will be sent to your creditors along with their terms and conditions. A bit of negotiating may happen at this stage.
Once the creditors and the borrower agree on all the terms, the counselor will ask for your bank account information. Monthly payments will be directly deducted from this account.
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