When Should You Consider a Debt Management Program?

Dealing with debt on a daily basis is difficult and stressful, yet the path forward is not always clear. You may have heard about any number of debt solutions and wondered which one is right for you. What works for one person is not necessarily the best option for another — the only way to eliminate debt is to learn as much as you can about the options available to you and choose the one that suits your needs.

debt management program
Shutterstock Licensed Photo – By Elle Aon

One such option is debt management. You’re probably wondering what this process entails and when should you consider a debt management program?

Keep reading to learn more.

What Is a Debt Management Program?

A debt management plan (DMP) is a program consumer may be eligible for through a non-profit credit counseling agency. After meeting with a credit counselor and assessing your personal financial situation, you may have the option to enroll in a DMP.

Instead of paying your creditors directly, you’ll make one monthly payment to the agency, which will then pay your creditors according to the agreed-upon repayment schedule. The counselor will negotiate on your behalf with the goal of getting lenders to agree to reduce interest rates and waive fees while you’re in the DMP. Be aware DMPs are typically designed to address unsecured debts, like credit card debt, rather than secured debts like mortgages and auto loans.

It then becomes your responsibility to keep up with these monthly payments for as long as it takes to repay your debts — generally three to five years. If you stop, you may lose all the benefits you gained from joining the DMP in the first place. You will also usually pay a startup fee and a monthly fee to participate.

When Should You Consider Enrolling in a DMP?

Now that you know how a DMP works, it’s time to evaluate your financial situation to see if you’re a possible fit. There’s no substitute for meeting one-on-one with a credit counselor — preferably one who’s been certified by the National Foundation for Credit Counseling. A counselor can look at your specific situation and lay out your options.

But there are a few general guidelines you can consider when assessing whether or not you should consider enrolling in a debt management program.

According to NerdWallet, you may consider a DMP as a viable debt relief option if these three conditions apply to you:

  • Your unsecured debt falls between 15 and 39 percent of your annual income.
  • You have a steady income and believe it will be possible for you to pay off your debt within five years with reduced interest rates.
  • You will be able to avoid opening new lines of credit during the years you’re enrolled in the DMP.

The reasoning behind these conditions? If your debt has not yet reached 15 percent of your yearly income, you may still be able to tackle debt on your own without having to enroll in a DMP. If your debt exceeds 39 percent, then it’s likely you’ll need a heavy-duty solution like settlement or bankruptcy — especially if paying off what you owe in five years seems unfeasible, even with reduced interest rates.

Furthermore, DMPs often require enrollees to close their existing credit accounts and avoid opening new ones. If you’ll require lines of credit to float your living expenses, you’ll be forced to violate the terms of your DMP which can jeopardize your debt elimination efforts.

Only you can decide whether you should consider a DMP based on their advantages, disadvantages and requirements. Do your research and meet with a qualified credit counselor when you’re deciding how to proceed.