Debt Management Options

Whatever your financial situation, it’s important to know you have debt management options.  Determining which debt management option is best for you will be a key factor in your success.  In the following section, we will explain how debt management plans work and describe various types of plans offered. 

Unit 1: Debt Management Options

If you are struggling to pay your bills, getting notices from debt collection agencies, consistently making late payments, or are simply overextended or overwhelmed with your debt situation - you’re not alone.  Whether the crisis is caused by personal or family illness, the loss of a job, or overspending, it can seem overwhelming. Your financial situation can improve by knowing your financial options.
Plans to manage your debt provide debtors with a range of choices depending on a debtor’s unique financial situation.  Each plan has its own advantages and disadvantages but all plans offer third party intervention with creditors and options for eliminating debts.  Remember to talk to your credit union about debt management options or ask about nonprofit credit counseling services. 

How to Manage Debt

A plan to manage your debt is any strategy that helps consumers repay debt obligations or otherwise handle debt payments through a plan of action that is mutually beneficial to both debtor and creditors.  Plans may involve working with creditors to restructure debt payments or negotiate better terms, consumer rights to legal protection and fair debt collection, strategies to accelerate debt repayment or elimination, loan products, or consolidating to better manage monthly payments. 

We will cover five common options on how you can manage your debt:  Nonprofit Credit Counseling, Personal Budgeting, Debt Settlement, Debt Consolidation, and Bankruptcy. 

Nonprofit Credit Counseling Services

If your financial problems stem from too much debt or your inability to repay your debts, a nonprofit credit counseling agency may recommend that you enroll in a Debt Management Plan (DMP).

  • A Debt Management Plan is a method for paying personal unsecured debts and involves credit education and counseling, an assessment of personal income and budget, and securing lower interest rates and payments with the lenders. Enroll in a DMP only after a certified credit counselor has spent time thoroughly reviewing your financial situation and has offered you customized advice on managing your debts.

Credit counseling involves a third party working with creditors to establish a debt management plan for a consumer. A DMP will help the debtor repay his or her debt by working out a repayment plan with the creditor. A successful DMP requires you to make one regular monthly payment to pay down debts. When using a debt management plan, you deposit money each month with the debt management agency, which uses your deposits to pay unsecured debts such as credit cards, student loans, or medical bills.  A debt management agency will develop a payment schedule and contact your creditors.  Ask the credit counselor to estimate how long it will take for you to complete the plan. Credit counseling services must adhere to the terms established by participating creditors. 
Common features of a nonprofit DMP are:

  • Debts are combined into one convenient monthly payment
  • Interest rates are lowered
  • Late and over-limit fees and collections calls are eliminated
  • Improved credit history
  • Debts are paid in full between 3-5 years

After joining a DMP, creditors will close the customer's accounts and restrict the accounts to future charges. The most common benefit of a DMP is the consolidation of multiple monthly payments into one monthly payment, which is usually less than the sum of the individual payments previously paid by the customer.

A second feature of a DMP is a reduction in the interest rates charged by creditors. Debtors with a defaulted credit card account will often be paying an interest rate approaching 30%. Upon joining a DMP, credit card issuers often lower the annual percentage rates charged to 5-10 percent. The reduction in interest rates allows a debtor to pay off large amounts of unsecured debts such as credit cards within 3-5 years without having to file bankruptcy or risk damaging future credit history. 

A third benefit offered by credit counseling agencies is the process of bringing delinquent accounts current. Often called "reaging" or "curing" an account, it occurs after making a series of on-time payments through the debt management program.  Re-aging does not eliminate prior delinquencies from a credit report; it allows a debtor a fresh start and an opportunity to begin building a positive credit history. Like all derogatory credit information, the passage of time will lessen the impact of the negative marks when credit scores are calculated.