Definition of a Debt Management Plan

When you find yourself in a large amount of debt, you may be tempted to take drastic actions, such as filing for bankruptcy or settling your debt. Instead of going to such extremes, you may want to look at a simpler option known as a debt management plan.

What is a Debt Management Plan?

A debt management plan is a type of system that involves paying off your debts over the long-term. Setting up this plan typically includes negotiating lower interest rates on your credit accounts. You then make one monthly payment to the debt management plan and all of your creditors are paid out of this money. One of the typical criteria for getting involved with a debt management plan is that you do not accumulate any more debt while you are in the plan.

Who Offers These Plans?

In most cases, credit counseling services are the ones who offer this kind of plan. A credit counseling service looks at your situation and offers some options for you to consider. The service typically recommends a debt management plan if your situation is not bad enough to warrant bankruptcy. The credit counselor then can set up the plan for you and start accepting payments from you. You will pay money into an account with your credit counseling service. Then, the credit counselor pays your creditors for you and also keeps a portion of your payment as a processing fee.

Time Frame

When you enroll in a debt management plan, you should plan on being a part of it for several years. For instance, most debt management plans are set up to last for somewhere between three and five years. You make a single payment every month and then the credit counseling service deals with making the multiple payments for you throughout the month. This will continue until you end your participation in the plan or until you pay off your debts.

Possible Scams

Even though many credit counseling services are legitimate companies, some are nothing more than a scam. These scams may collect your money from you and then never make the payments for you. When this happens, it hurts your credit because your payments are not being made. Some companies also have hidden fees that you may not know about when you make your payment to the plan. Companies in this market have even been known to lie about having non-profit status to create trust. Before signing up with this kind of company, it is important to look at its track record in the industry.