Debt Management Plans
Debt management plans or debt repayment plans are a service provided by credit counseling agencies to help consumers settle and repay debts. For consumers in a credit crisis, a good debt repayment plan managed by a credit counseling service will stop the collection calls, help avoid foreclosure and bankruptcy, lower your interest rates, reduce late fees, charges, penalties and lower your monthly payments.
The flipside of debt management or debt repayment plans is the possibility of negative impacts on your credit report, secured debts are generally not consolidated, variable fees assessed by the credit counseling agency, and risk associated limited government oversight to non-profit financial services companies.
What is a Debt Management Plan – A Repayment Plan
A debt management or debt repayment plan is an agreement between you, your creditors and a credit counseling to settle your debts and repay your creditors.
Lower Monthly Payments & Debt Reductions
Credit counseling agencies are able to lower your monthly payments using a debt reduction plan or debt management plan. A credit counseling agency will contact your creditors and notify them that you have chosen assistance to manage your unsecured debts. A credit counselor with the agency may be able to reduce the terms of your debt by negotiate removing fees, late charges and penalties. The amount of debt reduction varies widely by creditors, debt amounts, payment history, credit counseling agency relationships with the creditors and a number of other factors.
The Difference Between Debt Reduction and Debt Elimination
In most instances, credit counseling agencies are NOT able to eliminate or settle all of your debts for pennies on the dollar. CAUTION: a credit service agency, whether a credit counseling agency or credit repair company advertising Debt Elimination may be a Credit Repair Scam. Debt elimination is also called Debt Settlement or Debt Settlement Negotiation. Debt settlements are reported to the major credit reporting agencies as a “charge-off” which is negative to your credit report and damages your credit score.
What Kind of Debts Are Consolidated with a Debt Management Plan?
Credit counseling agencies generally only consolidate unsecured debts within a debt management plan or debt repayment plan. Unsecured debt has no collateral or assets attached (secured) to the loan. Unsecured debt includes credit cards, department store credit cards, fuel cards, personal loans, and medical bills. Examples of secured debt include mortgages and car loans.
Will a Debt Management Plan Lower My House or Car Payment?
Typically, the answer is “No.” Mortgages and car loans are secured debt and typically not included in Debt Repayment Plans. You will need to continue to paying your mortgage and car payments in addition to making a monthly payment to a credit counseling agency to consolidate unsecured debts with a debt management plan. Some unsecured creditors many choose not to recognize the credit counseling agency’s debt repayment plan and will need to be paid separately.
How Long Does it Take to Complete a Debt Management Plan
Debt management plans or debt repayment plans setup by credit counseling agencies typically range from 3 to 5 years to settle.
What do Credit Counselors Charge for Debt Management Plans?
The fees charged by credit counseling agencies to setup and manage debt repayment plans vary by agency. Most credit counseling agencies charge a fee to setup a debt management plan and charge a monthly maintenance fee. Non-profit credit counseling agencies debt management plan setup fees can be as low as $40. Debt management plan monthly maintenance fees range from free to $35+ per month.
Negotiated Charges to Your Creditors – “Fair Share” Fee
Another unadvertised aspect of credit counseling and debt management plans is the financial industry standard “fair share” fee. Credit counseling agencies negotiate the terms of debt with your creditors and typically charge the creditor a fee, up to 15% of the repayment amount. Many, not all creditors will report the debt as paid in full although accepted a reduced payment as a portion of your debt was paid to the credit counseling agency managing the debt management plan.
Will a Debt Management Plan Affect My Credit?
Most likely, yes. Creditors generally will close accounts that are managed by credit counseling debt management plans and your credit history may indicate the account has been closed by the creditor. Creditors typically do not reopen closed accounts and prefer consumers to reapply to open a new account. Creditors may report the account is closed AND managed by the credit counseling agency.
In addition, many credit counseling agencies advertise they do not work with or send information to the major credit reporting agencies. Some credit counseling agencies fail to mention some creditors may report accounts closed and worse, not as paid to the creditor’s initial terms. This type of negative reporting can stay on your credit report for 7 years.
