The first steps toward addressing your debt involves taking a hard look at your financial situation and learning more about the possible strategies available to you. This is why meeting with a credit counselor can be helpful in the early stages. These qualified professionals can help with everything from creating a budget to exploring options for debt relief. A credit counseling agency may also inform you that you’re qualified to enroll in its debt management program.
If you enroll in a debt management plan (DMP), you’ll start making one monthly payment to your credit counseling agency rather than paying your creditors directly. The agency will distribute those funds appropriately each month. The upsides? Creditors may agree to lower interest rates and waive fees for those enrolled in DMPs — plus you’ll only have to worry about a single payment.
But DMPs bring about certain challenges, too. Here are five to keep in mind before enrolling.
Challenge #1: You Will Pay Fees
While credit counseling appoints at non-profit agencies are often free, DMPs have fees. Most DMPs charge a startup fee — often around the $30- to $40-dollar range — plus a monthly maintenance fee between $20 and $30. Fees can vary quite widely based on state regulations and lender type. This is one of the questions you should always ask before enrolling to avoid the surprise down the line.
Challenge #2: DMPs Only Work for Secured Debt
Only certain kinds of unsecured debt are eligible for a debt management program — credit cards, some personal loans, and accounts that have gone to collection. DMPs are not a viable solution for student loans, car loans or mortgages.
Challenge #3: You’ll Have to Stop Using Credit
Your creditors will require you to close your credit cards while enrolled in a DMP — and you’ll also have to refrain from opening new accounts until you’ve completed the program. This can represent a major lifestyle shift if you’re used to putting most of your expenses on credit.
Challenge #4: DMPs Require Consistent Payments for Years
It can take years to complete a DMP. During that period, you’ll be responsible for making consistent payments to the credit counseling agency every month without fail. Falling behind on payments can result in creditors revoking the favorable terms they offered as part of the DMP — so it’s crucial to make sure you can commit to making those payments from beginning to end. It’s a solid idea to have an emergency fund built up from which you can withdraw payments in the case of fluctuating income or expenses. Making late or insufficient monthly payments can nullify the benefits of using a DMP and set you back on your journey toward becoming debt free.
Challenge #5: Not Every DMP Is Reputable
Not every DMP is reputable. It’s an unfortunate fact that predatory lenders will try to prey on vulnerable people desperate to find a way to solve their debt problems.
There are two key actions you can take to vet potential credit counseling agencies: Check online reviews from other consumers and verify an agency’s accreditation status before enrolling. Member agencies of the National Foundation for Credit Counseling (NFCC) have been verified by a third-party agency on many important criteria. Beware agencies that are “self-accredited.” Steer clear of organizations making offers that seem too good to be true or lacking transparency about the fees and process.
You may face these five challenges if you enroll in debt management. Weigh the potential difficulties against the potential benefits to decide if a DMP is your best bet for debt relief.