How a Debt Management Plan Works
If you're serious about paying off your debt one option that you'll probably hear about is a debt management plan or program. Debt management companies advertise these plans to customers who feel overwhelmed with obligations. Learn as much about these plans as possible before you sign up to ensure that its right for your needs.
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Identify Debts
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The borrower must create a comprehensive list all of his debts. He must identify all accounts, including contact information, and the corresponding balances. He must also list the minimum payment amounts and current interest rates charged on the accounts so that he and the debt management company knows exactly what he must pay off.
Negotiate With Debtors
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The credit counseling service or debt management company contacts all of the creditors on the list of debts to negotiate a settlement. The main goal is to get the creditor to lower the balance owed, eliminate fees, reduce interest rates or agree to some combination of these options to make payoff more feasible. The borrower must also commit to stop using his debt accounts to proceed with the process. Some credit counseling services require the borrower to take financial management classes as well.
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Establish Payment Plan
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After the debt management company comes to an agreement with each creditor, it initiates a payment plan. If the borrower agrees, he would have to commit to making a set monthly payment faithfully. Once the payment plan is established, the plan provider sends each payment to the debtor according to the rules of the DMP. In many cases the provider sends all money to pay the highest-rate debt at first until it is paid off then proceeds with other accounts. The DMP provider commonly charges a fee for this service.
Warnings
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Financial adviser Dave Ramsey warns against using debt management plans because they can tarnish a borrower's credit. Instead, he suggests that borrowers take personal responsibility over their financial behaviors and establish their own debt payoff plans. The Federal Trade Commission also suggests that borrowers ask plenty of questions and do extensive research on DMP providers with consumer protection agencies such as the Better Business Bureau as some companies have wronged borrowers in the past.
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