Understanding Debt Management Plans: A Comprehensive Guide

If you’re struggling with debt and consolidation isn’t an option, a debt management plan (DMP) can be a viable solution to help you pay down your debt over time, often with lower payments and interest rates. However, because a DMP may involve paying less than what you originally agreed, lenders may not always agree to the terms. If that happens, here’s what you need to know.

How Does a Debt Management Plan Work?

If you’re having trouble tackling your debt, a credit counselor can provide you with personalized advice. In some cases, the counselor may recommend a debt management plan. A DMP is a debt repayment plan that typically lasts between three and five years. To set up your DMP, the credit counseling agency will negotiate your unsecured debt, such as credit cards and personal loans, with your lenders. This may result in a lower monthly payment, a lower interest rate, or both on multiple credit accounts.

Throughout the DMP, you’ll make your monthly payment to the credit counseling agency, which will distribute the funds to your creditors. In exchange, you’ll typically need to close your credit cards and agree not to apply for more credit until you’ve completed your plan.

DMPs usually require a modest setup fee, as well as an ongoing monthly fee. It’s important to work with nonprofit agencies to avoid excessive fees. You can find a nonprofit credit counseling agency through the National Foundation for Credit Counseling or the Financial Counseling Association of America.

Do Your Lenders Have to Accept Your DMP?

While a DMP can provide you with some relief, lenders are not legally obligated to agree to them. Potential reasons why they may refuse your proposal include:

• They’re unwilling to accept the terms of the DMP.
• They don’t approve of your credit counseling agency (particularly if it’s a for-profit agency).
• They believe they can collect the full amount you owe another way.
• They believe that you can afford to pay more than you’re proposing.
• You’re not keeping your discretionary expenses to a minimum.

Some creditors may explain their reasons for the rejection and may even offer suggestions on changes you can make to your proposal. Depending on the circumstances, you may be able to come to an agreement with some adjustments. This may involve agreeing to a higher monthly payment or interest rate—albeit still lower than your standard terms—or providing more evidence to show that you can’t afford to keep making payments as originally agreed.

If a lender rejects your DMP or requests changes, consult with your credit counselor to determine your next course of action.

What to Do if Your Lender Rejects Your DMP

If you have one or more lenders that reject your DMP and refuse further negotiations, here are some steps you can take:

Continue Making Payments

You may be tempted to stop making payments on those debts, but that decision can do serious financial harm. Not only can it wreak havoc on your credit score, but it can also lead to more dire consequences. For example, the lender may sell your debt to a collection agency, which could sue you for payment.

Continue Paying Other Debts

If some of your creditors have agreed to your DMP, the reduced monthly payment could free up enough cash to keep up on your debts that weren’t included. Even if that’s not the case, some relief is still better than none.

Ask About Other Relief Options

Contact the lender that rejected your DMP and ask about other potential options for relief, such as short-term forbearance, a hardship program, or debt restructuring.

Look for Ways to Increase Your Income and Cut Your Expenses

While it may not always be possible, review your budget for potential areas you can pare back to make it easier to make your monthly payments. You can also look for opportunities to make more money.

Whatever you do, be sure to speak with your credit counselor to explore all of your options before you proceed.

Track Your Credit Score Throughout the Process

Being on a DMP won’t hurt your credit on its own. But certain aspects of the process can impact your credit score. For example, closing credit cards could cause your credit utilization rate to spike, which can damage your credit score until you pay down your debt.

Because a DMP can impact your credit, it’s important to monitor your credit score regularly to track your progress as you work to pay down your balances. With Experian’s free credit monitoring service, you’ll get access to your FICO® Score and Experian credit report. You’ll also get real-time alerts when updates are made to your credit report, making it easier to address potential issues as they arise.

At O1ne Mortgage, we understand that managing debt can be challenging. If you need assistance with your mortgage or have any questions about debt management plans, don’t hesitate to call us at 213-732-3074. Our team of experts is here to help you navigate your financial journey and find the best solutions for your needs.