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Tips on Understanding Debt Management Programs
November 09, 2010
When faced with overwhelming credit card debt, as many of us are in this recessionary era, we’re awash with options on how to deal with the debt: handle it on our own; try debt settlement; obtain a debt consolidation loan; file for bankruptcy; tap home equity, or join a debt management program through a credit counseling agency.

Each approach has advantages and disadvantages. Here we’ll clarify what’s entailed in a debt management program.

What is it?
A debt management plans are also commonly referred to as “debt management programs,” “DMPs,” and “debt repayment programs.”

First a person with unmanageable credit card debt seeks credit counseling at a consumer credit counseling service.  A counselor obtains an itemized list of the client’s monthly expenses and income. If a client has funds remaining in the budget, but can’t keep up with minimum payments, debt management becomes a possibility.

A debt management plan is a personalized, structured repayment program wherein you pay back 100% of your debt over time, a maximum of 60 months. You pay down the principal much faster than you could on you own and make one monthly payment to the credit counseling agency which electronically distributes the money to your creditors.

A good credit counselor will review the status of your creditors—tracking the name of the credit grantor, the account number and current interest rate.  Then the counselor will look up how much each creditor would charge in interest were you to join the program (policies between creditors vary greatly). A counselor can tell you how you could save in interest over the long term and your shortened payoff time.

What are the benefits?

  • Lower interest rates, late and over-limit fees.


By joining a debt management program, you show you wish to back your debt. In exchange, most creditors make concessions to the original agreement to help their customers repay their debt and avoid a potential bankruptcy.

Reduced interest rates and waived late and/or over-limit fees are the main appeal.
  • Decrease the payoff time.
    As a result of paying reduced interest and fees, more of your monthly payment is directed to pay off your principal, allowing you to shorten the duration of your payoffs.

  • Eliminate calls from collectors.
    Clients who are well behind on their bills are often hounded by collections agencies. Such calls will continue for about the first 90 days of the program (while the credit grantors process credit counselor proposals). During this period, you may tell collectors that you've joined a DMP and refer them to your agency’s Customer Service Department. Once the 90-day period has past, creditors will stop contacting you.

  • Improve stress.
    Once you regain control with a manageable action plan, your stress is greatly reduced. The uncertainty of how you are going to handle a large financial problem causes undue worry and tension. A reputable credit counseling service will encourage free follow-up visits with your counselor.  Should you have questions about your budget or credit, or your circumstances change, having access to a financial specialist reduces anxiety.

  • Make just one monthly payment.
    As a convenience, credit counselors consolidate your payments into one monthly installment that’s divided and sent electronically to each creditor. Usually set up as an automatic withdrawal from a bank account, this payment method reduces the likelihood of incurring late fees.

  • Pass on bankruptcy.
    A DMP works well for those who are ethically opposed to bankruptcy. Others cannot file due to policies of their employers who prohibit it.  Some choose another route to minimize the negative impact on their credit reports.

  • Emerge debt free.
    The goal is to help you become free of debt. For those who have been unable to control credit card debt on their own, the DMP is a great tool, along with a budget, financial education, determination and hard work, to help you payoff debt and secure a healthy financial future.
  • Potential downsides?

    • Use of credit.
      To allow you to concentrate on paying off debt rather than incurring more, you must close your accounts and stop using credit. As a result, visit any credit counseling service and you’ll see jars of cut up credit cards. Creditors actually monitor your credit reports to see if you make payments outside of the DMP to other creditors and may drop you from the program altogether if they catch you doing so. A few exceptions are allowed, such as if you have a corporate card for business and the bill is paid by your employer.

    • Impact on credit.
      Your creditors determine how your account will be reported to the credit reporting agencies.  Any payment options, which alter your original agreements with each creditor will affect your credit somewhat--some methods more than others.  Generally, filing for bankruptcy is the worst move (credit wise) and will leave negative remarks on your credit report for 10 years.

      After creditors accept the terms and receive three consecutive payments, some creditors “reage” your accounts (bring them current) that will improve your credit. If you haven’t been able to make payments, have a long history of late payments, or carry high debt loads, joining a plan, paying on time and working down your balances can actually improve your credit.

      To determine how a DMP would affect your credit, call each of your creditors and ask.

    • Must have some income to qualify.
      When counselors work with you to develop a budget, you must have some surplus income to pay your credit cards through a DMP. If your situation is extremely dire, another option may work better for you.

    Shopping for a Credit Counseling Agency
    Start by researching nonprofit credit counseling organizations. Search the Better Business Bureau (BBB) and check the agency’s “reliability report.”  For added protection, also consider doing business with BBB Accredited Businesses.

    Lastly, find out if it is a member of the National Foundation for Credit Counseling. NFCC members adhere to strict standards of professionalism and accreditation and draw upon only certified credit counselors.

    About ClearPoint
    ClearPoint Credit Counseling Solutions is a national nonprofit organization providing credit, housing and bankruptcy counseling in person, over the phone or via the Internet. Credit counselors teach consumers how to manage their money better, pay down debt, and save for a secure financial future.

    ClearPoint is a system-wide Accredited Business of the BBB, a member of the NFCC, and accredited by the Council on Accreditation.