Are Debt Management Plans Right For Everyone?

Debt Management Plans: It can be a seemingly unstoppable downward spiral. Debts pile up, perhaps because of big life changes and unexpected demands beyond anyone’s control. Medical bills, the loss of a job, the lingering effects of the recession that turned the economy upside down are all common reasons people today might find themselves behind the eight ball financially, and so is a person’s own lack of knowledge about how to have a healthy relationship with credit.

Whatever the cause, though, out-of-control debt comes with a huge price tag that can make digging out seem next to impossible. Payments are made late or not at all, and suddenly the cost of everything skyrockets. Interest rates climb to breathtaking levels and many regular expenses go through the roof as well, because businesses like your car insurance company are tracking your credit score and pricing accordingly.

Having too little money to pay your bills can be very expensive. And that’s the point at which beleaguered debtors often begin looking into (DMP). And rightly so. DMP can be valuable tools in many cases, when debt spins out of control. They can relieve the pressure of constant calls from debt collectors and give you a basis for getting back on track.

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But that fact comes with a caveat, too. DMP also come with a downside, so it is critically important that you understand the pros and cons of entering into one before you make that leap.

Weighing the Options

Before considering the pluses and minuses of entering into a debt management plan debt management plans, it’s important to look at both what the plan is and what it isn’t.

The plan is a formal agreement, typically made through either a specialized for-profit or nonprofit agency and intended to change the terms of your loans, ideally lowering payments and reducing interest rates to make repayment more realistic.

In simple terms, the debtor makes a single monthly payment to the agency to cover all of the bills involved, and the agency works with the creditors. It doesn’t make the bills go away, but it can make them more manageable.

That’s an appealing thought, and a successful DMP can make a difficult situation more bearable and even help you avoid bankruptcy.

Still, there are negatives to consider.

One possible effect of DMP is a drop in your credit score. That’s not necessarily the case (the score could actually go up for some people), but it’s more likely than not. Your individual circumstances will determine what happens in your case.

Some creditors may close your accounts (an action sure to reduce your credit score).

You won’t be able to get any new credit while the DMP is in effect, and that can be as long as 60 months in many cases. If your car might be on its last legs, for example, that credit freeze can present a big problem.

A DMP will bring some relief longer term, but be aware it is not an instant fix. It can take a month or maybe two for the agency to negotiate with your creditors and set the plan in motion, and during that time you could still be racking up late fees and fielding calls from creditors.

On balance, the decision to enter into debt management plans is a personal one and there’s no single right answer, as long as you have the information you need to evaluate the options with your eyes wide open. Like every major financial decision, it comes down to carefully weighing the benefits and the costs in terms of your own specific circumstances.

When it comes to matters of money, after all, one size never fits all.

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