In the world we live in, it’s easy to give into the temptation of excessive spending and fall into debt. Becoming financially savvy and knowing how to make smart financial decisions can keep you out of severe debt and allow you to effectively manage what debt you take on.
What is Debt Management?
Debt management is how you handle the debt that you assume through credit cards, loans, or other means. Budgeting effectively and showing restraint in assuming any unnecessary new debts can allow you to manage your debt independently.
However, if you do find yourself in more debt than is manageable by yourself, you may want to consider some form of debt relief service. Debt management plans (DMPs) are a common service that can help people overcome their debt.
How to Manage Your Debt Independently
You won’t need to spend any time or money on debt relief programs if your current debts are under control. Here are a few things to keep in mind along your financial journey to avoid falling into excessive debt.
Budget – Maintain a budget using a budgeting method that works best for you and adapt with any changes in your income or expenses.
Be Proactive – Don’t wait until your debt becomes unmanageable to take action. Consider some DIY debt management tips such as the debt snowball method to gain back control before an external service is needed.
Stay Aware – Monitor your transactions, credit, and spending habits to ensure everything is accurate and be honest with yourself about any unhealthy spending habits you start to notice.
Use Caution in Assuming New Debt – Debt isn’t always a bad thing. If you plan on using a credit card or making big life purchases like a home mortgage or financing a car, you’re going to have debt. Just be sure you spend adequate time planning to ensure you can afford to repay the debt you assume.
What Are Debt Management Plans (DMPs)?
When debt becomes unmanageable, don’t fret. There are helpful services that can help you get back on track with your finances. DMPs are provided by companies that will review your current financial standings and debts, work with you and your creditors, and find the most effective way to settle your debts.
In a DMP you may be able to benefit from waived or reduced fees, lower overall cost, and fewer collection calls. Additionally, this can positively impact your credit and help you to achieve your financial goals.
Debt Management vs. Other Debt Relief Services
There are several other forms of debt relief services in addition to DMPs. These each have their unique advantages that lend better to various financial situations.
- Credit Counseling
Services that offer credit counseling can be a great first step before more severe measures to get out of debt. Credit counselors can help you with things like credit, saving, and budgeting. Check out our helpful resources on these topics as well!
- Debt Settlement
These programs are often offered by companies for profit. In debt settlement programs, the service will require you to add money to an account and then negotiate with your creditors with the goal of reducing the amount owed to settle your debt for less than the full amount. - Debt Consolidation
These programs require significant collateral, such as your home. Second mortgages or a home equity line of credit (HELOC) are examples of consolidation loans. In this process, your debts would be combined into a single account that you would then make payments to rather than juggling many different sources of debt. - Bankruptcy
While this should be kept as a last resort, personal bankruptcy is also a form of debt relief. Declaring bankruptcy will make assuming new debt very challenging, but can provide a new start for people in severe debt by receiving a discharge at the end, clearing the responsibility of some old debts.
Do You Need a Debt Management Plan?
Knowing how to tell when you need to consider services like a debt management plan is the key. Before diving into a DMP, it’s important to consider alternatives, pros and cons, and ensure that you’ll follow through with the plan.
People may consider a DMP if they have:
- Excessive unsecured debt, such as utility bills or credit cards
- A desire to benefit from paying debts at a lower rate and reduce collection calls
- The ability to avoid assuming new debt while effectively making payments through the duration of the plan.
Pros and Cons of Debt Management Services
| Pros | Cons |
|---|---|
| Provides a more manageable debt solution | You’ll be unable to assume new debt temporarily |
| Does not directly negatively impact your credit score | Credit card accounts will be closed |
| Reduces your amount of debt | Not all creditors will accept being a part of a DMP |
| Expedites debt repayment | Beware of debt management scams |
| Potentially lower interest rates | Depending on the DMP plan’s payment structure, it could be costly |
| It is likely to see a positive credit impact long-term | |
| A credit counselor will assist you in working with creditors |
How to Find the Right Debt Management Plan for You
If you’ve determined that a debt management plan is the route to take, tracking down the best DMP depends on a few things.
- The current state of your debt
- Your active creditors
- Your financial goals and upcoming plans
Make sure you do adequate research before committing to a DMP service. Unfortunately, there are DMP scams out there that seem great on the surface.
Debt management scammers can charge high fees, fail to pay or only partially pay creditors, inflate their savings estimates, and ultimately cause more harm to your financial wellbeing than anything.
Be sure to do research about any DMP you are considering, read reviews, and ask any questions you have up front before making a commitment.
How Debt Management Plans Work: Step-By-Step
A reputable DMP company will provide counseling and assistance throughout the program. While individual processes may vary, here’s generally what you could expect throughout a debt management plan.
- Discovery Phase
You’ll sit down with a credit counselor and review all of your financial information and provide them with a good picture of your current standing and your options. - Credit Pull
It is necessary for the credit counselor to check your credit, however, this is a soft inquiry, so there is no direct negative impact to your credit score. - Analyze Money Habits
The counselor will review your current financial patterns and spending habits to offer advice on how you can improve. Then, they can provide options for moving forward, such as a debt management plan. - Negotiating with Your Creditors
Your counselor will help craft proposals to be sent to creditors, often aiming to secure reduced payments, lower interest rates, or a modified schedule. Creditors can either approve, counteroffer, or deny these proposals. Once all creditor proposals have been finalized, they are compiled into a program that becomes your debt management plan. - Payment Process
Typically, you can work with the DMP service to provide your banking information for automatic payments. - Monitor Payment Progress
Once that begins, you should be sure to monitor progress both with the debt service as well as with your creditors to ensure everything is running smoothly.
In most debt management plans, your payment amount remains the same, even after you fully pay off individual debts. This will only expedite the rate at which the remaining ones are paid off.
Your Responsibilities
As the consumer, there are certain responsibilities that you must uphold to make any DMP successful.
- Ensure that you’ll have sufficient funds to make all payments on-time and in-full.
- Monitor your progress throughout the program and flag anything that doesn’t seem correct to your credit counselor.
- Provide accurate information to the counselors and creditors.
- Abide by the rules of the program including not opening new lines of credit, paying any fees, and closing existing accounts.
Debt Management Service Provider Responsibilities
Of course there are also responsibilities of the DMP service and your credit counselor. That’s what you’re paying for, right?
- Work with you through the discovery phase to thoroughly understand your financial situation and determine the best route forward.
- Negotiate with creditors to secure the best program possible.
- Work with you throughout the program to explain the process, answer questions, and keep you up to date.
- Develop and initiate an affordable payment schedule for you to repay the existing debt after negotiations.
Creditors Responsibilities
There are also responsibilities of your creditors, if they choose to participate in the debt management plan.
- Work through negotiations with your counselor.
- Monitor payments contributed through the DMP.
- Properly update you, the DMP service, and credit bureaus after the debt is fully repaid.
Alternatives to Debt Management
As we’ve mentioned, DMPs come with their own pros and cons. They aren’t for everyone, and we recommend that if your debt is manageable on your own, you should try to get back on track without a debt management service first.
Other debt relief and financial services such as debt consolidation, debt settlement, credit counseling, or bankruptcy can be alternatives to a DMP. However, if you buckle down, learn, and establish healthy financial habits and practices, you may be able to manage your debt fully independently.