The Pros & Cons Of Using Debt Management Plans

July 25, 2017

Back in my twenties, I found myself bored with life and looking for a change. For most people, a new hair cut and outfit might suffice, but I decided to join the Army. I wish I had some deep, thoughtful, spiritual answer as to why I enlisted, but essentially, I was bored.

While in the Army, I was introduced to a whole new world of “necessities,” such as making sure the brand of my shoes matched the brand of clothing I was wearing. This new “necessity shopping” was expensive, but luckily Visa, MasterCard and Discover came to the rescue — mind you, this was before I was a financial planner, so a bit clueless to the woes of credit cards. It did not take long before I racked up more debt than I could pay off and quickly found myself in over my head.

Unsure of what to do, I reached out to a friend who had used a debt management program before and quickly signed up. In retrospect, I was lucky — the program I chose was a non-profit so it was an overall good experience, although there were definitely drawbacks. (programs that are run by for-profit enterprises are often predatory and can leave people worse off than before they started — to vet a potential credit counseling or debt management program, check to make sure they’re a member of the NFCC before you sign up for anything).

Here’s a quick review of what I learned along with the good, the bad and the ugly.

The Pros:

Automatic discipline. While on the program, my credit was frozen, which prevented me from incurring additional debt. My monthly payments came out of my checking account automatically and I knew exactly how long it would take for me to get out of debt.
Expert negotiators. I was young; I had no idea how to talk to a boy, much less talk to a creditor about lowering my debt. The counselor I worked with was trained to negotiate with creditors. She was able to get my interest rates cut in ½ and negotiated a payment plan that still allowed me to have a life while paying off my debts.
Forced money management: To get on the program I had to work with my counselor to develop a spending plan. The spending plan helped me live within my means and manage my income.

Although the program did help me to pay off my debts there were drawbacks.

The Cons:

Can affect your credit score. Everyone’s experience is different, but my creditors reported that I was on a debt management program to the credit agencies, so it showed up on my credit report. As a result, my credit score dropped (it eventually went back up once I completed the program). If you are thinking about buying a car or a home within the next two years, you may want to work with your creditors on your own to keep your score up.
Fees. Although they were nominal, there were still fees to pay, which added to the total of what I had to pay overall to get out of debt. The fees can vary depending on your service provider, and are usually in the $25 to $50 per month range. (and if anyone tries to get you to pay several thousand up front, run away — that’s the wrong kind of program)
Rigid terms. The terms you agree to are pretty set, with little wiggle room. Generally, if you miss even one payment, you can be kicked out of the program, depending on your creditor. If you have unsteady income, you may want to hold off on entering into a program until you are certain you can commit to the monthly payments.
Only certain debts are covered. If you’re looking for help with your mortgage, car notes or other secured debts, a debt management plan won’t work — they really only cover unsecured debt such as credit cards or personal loans.

It’s important to understand that these programs are not a great fit for everyone. A debt repayment program renegotiates your repayment terms, but it doesn’t reduce the amount you owe. If you are looking for actual debt reduction, the program may not work. But if you’re ready to buckle down and do what it takes to be debt-free, then it can definitely make the timeline shorter and help give you the discipline you need.