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What is a Debt Management Plan and Do You Need One?

What is a Debt Management Plan and Do You Need One?

Are you looking for debt advice and ways to manage your finances? Perhaps you are struggling with credit cards debts. The good news is that a well-tailored debt.management plan can help you consolidate your debt payments and lower interest rates.

Debt management is an unofficial agreement with the unsecured creditors for the repayment of your debts over a certain amount of time.

What Is a Debt Management Plan?

A debt management plan (DMP) is a service or debt repayment program offered through a licensed debt manager companies. In this repayment schedule, the debt management company consolidates the credit card debts into a single and affordable monthly payment. These companies also offer debt advice, help you assess what you can afford to pay each month and make sure your DMP will help you repay your debts in a reasonable time, in amounts you can easily pay each month.

The borrowers in this program agree to cease using their credit cards to get more affordable monthly payments and lower interest rates on their credit cards debt.

How Does a DMP Work?

The debt management company will work with you to get a picture of your financial condition and the information on all the debts you owe. After acquiring all the information, your DMP provider will then work with creditors to find a repayment plan that will work for everybody.

In most cases, the creditors may lower monthly payments, waive fees, and reduce interest rates, but they will never reduce the balance that you owe them.

After your DMP provider sets the plan, it will require you to pay one monthly payment to it. Afterward, the DMP provider will distribute the payments to each creditor according to the agreed plan.

The time in which you will remain in a debt plan management will depend on the program you have chosen. Keep in mind that you may be on DMP for several years.

After agreeing to a DMP plan, it is recommended to make every debt payment on time. Late payments can make the creditors opt-out of the plan, which will make you go back to high-interest rates.

Effects of a Debt Management Plan: What Does It Do?

A DMP will affect both your financial and personal life, and it will have both advantages and disadvantages.

Below are some benefits of debt management plans.

  • It will simplify your payments because the debt management company will require you to write a single check to cover all your credit payments to your creditors.
  • You could get out of debt within 5 years if you follow the set conditions.
  • It will help you in getting more affordable payments by lowering the interest rates on your overall debt.
  • No more calls from the creditors or collection agencies.

The downside of getting a DMP, however, is that:

  • You cannot miss any payment because if you do so, you will lose the concessions that the card companies had made for you.
  • It only applies to credit cards; therefore, other creditors you owe, for example, unsecured debts such as medical debt may not apply.
  • Not all companies will cooperate, for instance, gas stations and department store card companies may disagree with letting you pay your debts to them through a DMP.

Can You Buy a Car While On a DMP?

Yes, you can, there is no legal law that prevents you from buying a car when you are on a debt management plan. However, the only issue is where you will get the money from.

Being on DMP implies that you have some difficulties in paying your debts. It also shows that your credit record is not perfect and you may not be having the required money to purchase the vehicle. To some lenders, that could be enough reason for rejecting your car loan request.

What About Getting a Credit Card While on a DMP?

A debt management plan aims at helping you get rid of your debt in the shortest time possible and at affordable monthly payments. Getting a new credit card is not a good idea, but your request for a new card can be approved even when you are in a debt management program.

Nevertheless, the creditor with whom you will request the credit card from will review your credit score, credit report, and your income to determine if you will be able to pay. The debt management agency will not inform the credit bureaus that you are participating in a DMP.

However, some of the creditors that may have enrolled in your plan may include this in your credit report. This can make your request for a new card denied.

What Happens When You Get a Debt Management Plan?

In a DMP, a person enters into an agreement which requires them to pay back the money they owe to their creditors. A debt management company uses a DMP when the consumer can afford to pay small monthly payments to the creditors or when the consumer has debt problems and is able to make monthly payments within several months.

What Debts Are Included in a DMP?

In a debt management plan, you can only pay off non-priority debts such as water bills, benefits overpayments, credit cards, student loans, and bank loans.

Priority debts such as overdue VAT or income tax, magistrates’ court fine, mortgage, TV license fees, and overdue payments for council tax, gas, child support, and rent are not included in DMP. That is because they have severe consequences for those who do not pay them.

How Long Will a DMP Affect Your Credit Rating For?

All accounts included in your DMP will drop off your report after six years, starting from the closing date of the account. After, the DMP will not have any negative impact on your credit report.

You can leave the debt management program any time, but those markers that were used in recording the DMP will remain on your report until six years are over.

Additionally, if your accounts become delinquent as a result of missed payments during a DMP, the negative marks will remain on your credit report for 7 years.

Final thoughts...

A DMP can help you liaise with your creditors and pay off your debts in a consolidated way, in only one monthly payment. You will get expert debt advice on how to best get rid of your debts in an affordable, sustainable way. They can help you freeze interest, making it a great solution to improve your financial problem. Before signing up for a DMP online, you can usually call and get free debt advice from the company and then make a decision whether going into a plan is the right thing for you. They will usually send an email summary detailing their services and offers with all associated fee and charges. You can then contact them with any further question and enter into a plan you want based on their advice and feedback.