What is debt management services? (2024)

What is debt management services?

What Is Debt Management? Debt management involves overseeing and collecting payments on debts owed by individuals or businesses. This involves creating a payment plan, working with creditors to lower interest rates, and negotiating terms for repayment.

Debt management is a way to get your debt under control through financial planning and budgeting. The goal of a debt management plan is to lower your current debt and move toward eliminating it.

A DMP provider works on your behalf to work out what you can afford to pay, negotiate payments with creditors, and distribute the payments to your creditors each month. Clearly, any organisation or company providing a professional service like this will have costs it needs to cover.

With a debt management plan, you'll make just one monthly payment to the credit counseling agency rather than paying your creditors directly. The counseling agency will disburse the money to your creditors on your behalf, based on a payment schedule they agree on together.

A debt management program is not a loan. It consolidates unsecured debts and tries to lower monthly payments through reductions on interest rates and penalty fees. A debt consolidation loan is actually a loan, with interest charges and monthly payments due.

A DMP may be a good option if the following apply to you: you can afford your living costs and have a way to deal with any priority debts, but you're struggling to keep up with your credit cards and loans. you'd like someone to deal with your creditors for you. making one set monthly payment will help you to budget.

To cancel your DMP, you need to contact your provider and ask to cancel. They will inform your creditors that the agreement has been cancelled, so you can expect to start dealing with them yourself again.

The idea of having a notation on your credit history may initially send up red flags. But while a debt management plan does affect your credit history, it does not have a lasting negative effect on your credit score.

Yes, getting a loan is possible to be obtained whilst on a debt management plan. However, it is always worth considering is it necessary whilst on reduced monthly payments to your other debts. Obtaining further credit puts more strain on your financial commitments, and could leave you short with other living costs.

Creditors typically require that credit card(s) included in a DMP be closed to prevent additional charges. You may be allowed to keep one card open and off your plan for emergency purposes.

Will debt relief ruin my credit?

The interest-free period means your whole payment goes to reducing the balance, making faster progress. Or you may find a debt consolidation loan with a lower interest rate than you're paying now. Those options won't hurt your credit; as long as you make the payments, your credit score should rebound.

The main debts left out of DMPs tend to be secured and priority debts, like mortgages or car finance agreements, which will need to be paid as usual. If you're struggling to pay any of your priority debts, you'll need to speak to your suppliers.

Once you start your DMP, you'll only have to make one payment each month to cover all debts included in the plan. Your provider will split this money between your creditors. You'll continue to make these payments until either your debts are cleared or you're able to make the full, original payments again.

Sometimes a creditor will refuse to deal with a DMP provider. This could be because the creditor doesn't want to accept the reduced payments or sometimes it could be because they've objected to you using a fee-charging provider, which would mean there's less money to pay the debts you have with them.

Creditors are not legally required to settle for less than you owe. Stopping payments on your bills (as most debt relief companies suggest) will damage your credit score. Debt settlement companies can charge fees. If over $600 is settled, the IRS will view this debt as a taxable income.

The accounts you are repaying your DMP through will already be listed on your credit report, and once the DMP is complete the marker will be removed and the accounts themselves will be marked as closed – they will then remain listed for six years from the settled date.

Yes, it is possible to get a mortgage while you have a debt management plan, but it may be more challenging. A debt management plan (DMP) is an informal agreement between you and your creditors to pay back your debts at a reduced rate over a longer period of time.

The cons of Debt Management Plans

This can slightly lower your credit score, because closing multiple accounts at the same time affects the length of your credit history. However, that score will increase with on-time payments and because the debt is paid down faster on the DMP.

Unfortunately, there is no such thing as a government-sponsored program for credit card debt relief. In fact, if you receive a solicitation that touts a government program to get you out of debt, you may want to think twice about working with that company.

What happens if I don't pay my debt management plan?

Missing a payment will mean your creditors don't get the monthly payment they're expecting, which may mean they decide to stop co-operating with your DMP. Don't bury your head in the sand, as this will only make the problem worse. Talking to your provider quickly is the only way to get the problem sorted out.

The fees charged by for-profit DMP providers vary. They are typically around 17% of your monthly payment. Before you start a DMP with a company that charges you, make sure you: Find out what you are paying for.

The short answer is Yes, people are generally allowed to use their credit cards after debt consolidation as it does not typically involve closing credit card accounts.

Getting a loan or mortgage while on a DMP is possible, though not always advisable. The longer you are successfully paying down your debt, the better the chance your credit score improves and with it, terms for a new loan or mortgage. However, if you're trying to buy a house, you'll need a down payment.