What is a Debt Management Plan?

A debt management plan might be appropriate for you if you are unable to pay your debts due to loss of work, reduced income or too much debt or you’re just barely making the minimum on your credit card payments.

NOTE: A debt management plan and a credit counseling program although are similar but are not the same. Debt management programs are not for everyone. If you find yourself facing major debt problems, you might consider getting outside help to help reduce your debt.

Before you enroll in a Debt Management Program

Here are some important questions to ask if you’re considering enrolling in a debt management program:

• Will my creditors be paid by the due date? Many debt management companies make weekly disbursements to creditors to ensure that payments are made on or before your creditor's due date. Ask how payments are made, and when, so you don't end up with late payments on your credit report.
• The goal of a debt management program is to help you reduce your payments. Don’t enroll in a debt management program if the amount is more than what you can afford. Once enrolled, you’ll need to make the monthly minimum required otherwise your agreement will be cancelled and outstanding balance sent to collection.
• Does the debt management program include lower interest rates or waived late fees? Make sure you contact your creditors for verification before you enroll debt management program.  
• What types of debts are included in the debt management program? Not all types of debt are included (gas bills, phone bills, etc. already in collection) might not be included. Make sure you verify what debts are included before you enroll. You’ll be responsible for making payments on what’s not included in the program.
• Do I have to make any payments to my creditors before they will accept the proposed payment plan? You should continue to pay your creditors directly until you've been notified that your debt management proposal has been accepted.
• What’s the effect of a debt management program on my credit report? While enrolled in a debt management program, your credit history will reflect that you are enrolled. This might prevent you from applying for more credit and will show potential creditors that you are enrolled in the debt management program. Overall, it does help your credit on the long run once completed successfully.

How does a Debt Management Program Works

Once enrolled in a debt management program, a proposal is sent to all your creditors outlining the terms of the payment plan, payment amount (monthly weekly or otherwise) interest rate reduction (if any), length of time over which payment will be made. Once the proposal is accepted, money will be deposited with the debt management company and the company will send payments to each of your creditors enrolled in the debt management program.

Will I Be Able to Get Credit When I Complete My Debt Management Program?

It is advisable not to apply for more credit once you complete the program unless your spending habit or net income has changed. During the time period that you are enrolled in a debt management program, you will likely not be able to apply for credit.

Once you've completed your debt management program, your accounts will be marked as "paid in full", and your credit report will show several years worth of regular, on time payments. All of this will improve your credit score, and will make you more attractive to potential creditors. Once you sign up with a debt management program, your creditors will close the accounts you are consolidating, and you will not be allowed to sign up for new credit.

Before You Enroll in a Debt Management Plan

Debt Management Plans, also known as debt consolidation, is not for everyone. If you have determined that you have a serious debt problem, you may benefit from some outside help in getting your debt paid down. If you decide to enroll in a debt management program, do your research before signing anything.