If you’re drowning in debt and have no other options, a debt management plan can get you back on track. Here are nine things you need to know before you say yes. If you want to become debt-free and to avoid racking up that much debt in the future, review your situation and check if you’re a good candidate for this plan.
It Doesn’t Work All the Time
Debt management plans only work on certain types of debt. If you have unsecured debt, such as debt from credit cards, personal loans, medical bills, and utilities as well as rent, then you are eligible for the plan, the Finance Buzz says. If you owe a secured debt, though, you’ll need to consider other options.
It Takes Time
The plan isn’t magic. It’s not going to magically make your debt disappear. Repayment periods are often at three to five years to complete, so expect to spend that much time in paying off all of the money you owe.
Say Goodbye to Credit Cards
You may need to say goodbye to your credit cards. Many lenders require this, as it helps discourage more spending. If your credit card spending is what got you into this in the first place, learn to live without one.
Not All Debt Pros Help
Discussing your options with debt counselors helps you get a better perspective of the situation, what you’ll need to do, and what you’ll face in the years to come. But not all debt counseling services or even companies that offer debt management plans are equal. Research thoroughly to make sure you pick a team of trusted professionals that will provide you with solid advice and guidance.
Your Credit Score Will Drop
Your debt management firm will renegotiate terms and conditions with your creditors. That takes time, which could result in late payments on your credit history. Some also close your accounts when you enter a debt management plan. However, the impact on your credit score is only temporary. If you pay on time every month, your credit score will improve.
You Can’t Get New Credit
Once you’ve enrolled yourself in a debt management plan, you won’t be eligible to get a new line of credit, Money Under 30 says. That means you’ll need to rethink your plans to get an auto loan, for instance. If you don’t, you’ll likely lose the benefits of the program.
You Get a Lower Interest Rate
Most creditors lower your interest rate by several points until it’s usually between a rate of about 12 to 16 percent. If your current interest rate has you paying 17 percent or more, then a debt management plan is smart and practical.
Your Fees Will Be Waived
Your creditors can also talk to your creditors about waiving future late fees while the creditors adjust your payment schedule. That can save you as much as $40 a month for every creditor on your list.
You can Avoid Bankruptcy
While you still retain the option, debt management is preferable to filing for bankruptcy, especially considering its impact on your financial future.10