Debt management is the process of negotiating an amended payment plan with a lender in order to make monthly payments more manageable. In most cases, that is achieved by lengthening the repayment term, lowering the interest rate, and waiving certain fees. Debt management does not include the forgiveness of any principal balance owed. That would be more along the lines of debt settlement. Debt management isn’t credit counseling either, but it’s often a service provided by credit counseling companies. Confusing, I know.
Still, enrolling into a debt management plan with your lender can be extremely helpful. Sometimes a bit of a break in the short-term is all one needs to avoid missing additional payments and getting into even more trouble with creditors. While enrollment in a debt management plan will hurt your credit standing some in its own right, the effects are far less severe than they would be if you don’t figure out a way to get back on track.
In short, debt management can be a great option, but you need to approach it strategically for it to work to full effect. If not, it can end up exacerbating your problems.
How Debt Management Works
If you have significant credit card debt at an interest rate above 15% and you are struggling to make your minimum payments, you might be eligible to enroll in a Debt Management Program (DMP).
Creditors will record on your credit report that you are on a DMP and although you are not paying as originally agreed, they have accepted the reduced payment. This will have a negative impact on your credit rating because it is an indicator that you are experiencing, or have experienced, financial difficulties.
You shouldn’t worry too much about that, though. The hit to your credit will be way worse if you don’t set up a debt management plan and you ultimately fail to find another solution. Default and bankruptcy remain on your credit reports for 7-10 years. When you’re enrolled in a debt management program, your lender will likely report you as such, noting that you are not paying as originally agreed, though they have accepted the reduced payment. However, debt management credit reporting procedures vary by issuer, and whatever notation happens to be on your reports will be removed once you’ve repaid your debt. In other words, it will signal to other lenders that you are a risky candidate to borrow until your debt problems are sorted out.
So focus on coming up with an arrangement that will enable you to fulfill your obligation in time, thereby allowing your lender to get all of its money in time. Your debt’s not going to get dissolved, but you’ll have a clear line of sight to a debt-free future.
If you decide to pursue debt management, you have two options: doing it yourself (i.e. DIY debt management) or hiring a debt management company (which might also go by the name of debt relief company, debt repair company, etc.). We’ll stick to DIY debt management here, and you can read more about working with a debt management company in the section below.
DIY Debt Management
The first step involves preparation. Yes, you’re going to need to establish a dialogue with your lender, but you want to be ready first. So, figure out exactly how much you can pay each month as well as how you want to present your situation to your lender. “You need to think about what are the outcomes that would be good for you, what are the outcomes that would be good for them, and where’s the opportunity between those positions or among those positions where you might be able to propose some creative alternatives or provide information that changes the nature of the interaction,” says Margaret Neale, Adams Distinguished Professor of Management at Stanford University.
You’ll also want to build evidence to support the notion that you will abide by the terms of an amended payment plan if granted one. For example, illustrating a pattern of on-time payments in the months leading up to your recent difficulties can go a long way toward establishing your credibility.
“Have all the facts, documents, and information and review them,” recommends Nancy Soonpaa, director of the Texas Tech University School of Law’s Legal Practice Program. “If thinking on your feet doesn’t come naturally, then brainstorm and practice beforehand. Have someone else take on the role of the person with whom you’ll be negotiating and practice saying the words.”
Next make the call to your lender. Calmly explain your situation and ask if there is any way to work out a payment plan that will reduce your monthly payment, allowing you to stay current and ensuring the lender gets all of its money back when all is said and done.
Avoid making any direct ultimatums, demands or assumptions, and don’t be afraid to admit that a given offer isn’t going to work for you. Your lender’s first offer isn’t necessarily the only one, and they would certainly prefer to find out that you can’t afford a new, lower monthly payment now rather than a few months down the road.
Ultimately, the goal is to secure in writing a new payment plan that requires monthly payments you’re sure you can afford. Don’t give up if you don’t get it right away, just keep the lines of communication open and be creative and persistent.
Debt Management Companies
A wide range of companies operate in the debt management space. Basically, they act as your representative, using their knowledge of the debt negotiation process and industry connections to smooth the transaction. They are particularly adept at working out deals with multiple lenders simultaneously, thereby enabling people with multiple balances to ease their burden with a single monthly payment to the company representing them.
Most don’t do it for free, though. While a handful university law clinics and government-subsidized programs may provide free assistance to a few fortunate consumers, the vast majority of people who hire a company to manage their debt wind up paying for it. That’s even true if you’re working with a non-profit, though we definitely recommend doing so because they are generally cheaper, more effective, and more reliable.
There usually is no fee for the initial consultation, but if you decide to participate in a DMP, fees typically include a one-time set-up charge and a modest monthly fee, determined by your state of residency. These fees are included in your monthly debt management payment plan.
Note: You should not make a payment before your creditors have agreed to the terms of the program prescribed by your credit counseling company. As with any business, there are some credit counseling agencies that operate with good ethics and some that do not, so you can’t always trust their promises. Make them earn it.
It’s also important to note that you should not agree to any debt management plan that you can’t afford. Missing a scheduled payment while in the program may be grounds for creditors to drop a client from the program. Lenders don’t take kindly to it either, and they may be more inclined to sue for amounts owed if you default.
Pros & Cons of Debt Management
| Pros | Cons | ||
|---|---|---|---|
| Peace of Mind | Having a line of sight to debt freedom as well as not having creditors calling you over and over will save you a lot of grief. | Not a Guaranteed Deal | You need a deal to which you can abide, and there’s no guarantee the creditor will accept those terms. |
| Prevents Serious Credit Damage | By preventing missed payments from piling up, you’ll avoid default and bankruptcy. | Longer Time Frame | You’ll be in debt longer (but you’ll save money in the long-run too). |
| Saves Money | When enrolled in debt management, you won’t be sued and you’ll avoid a ton of finance charges. | Potential Cost | If you hire a debt management company, you’ll probably have to pay some fees. |
Debt Management Alternatives
Debt management is not your only option if you have debt problems. In fact, if your difficulties are either too far gone or too minor, your lenders might not even agree to a program. Sure, it’s always helpful to maintain a dialogue with your lenders (unless you’re waiting out the statute of limitations – not recommended!). But you should also know about and understand your alternatives.
In short, your basic alternatives are just scrimping and paying as agreed, debt settlement, and perhaps even bankruptcy. To compare these options, check out WalletHub’s Debt Solutions.
Debt Management Tips
- Try to Do It Yourself: It can’t hurt to call your lender and see what your options are, so why pay someone money if there’s a shot you can negotiate an arrangement on your own. If you reach an agreement in principle, it might be worth running the terms by a financial counselor who offers free consultations just to make sure you’re getting a good deal.
- Take Advantage of Free Consultations: Whether or not you opt for DIY debt management, getting some tips and advice from a professional is always a good idea. Non-profit credit counseling companies offer free consultations and you can use the time to pick their brains about strategies, things to watch out for when dealing with lenders, etc. While you don’t have to hire them, their input will certainly help you.
- Have an Open Mind: While you should be mindful of your limits, you must avoid tunnel vision. Consider all feasible ideas, if just as a suggestion.
- Be Prepared: Reading this article is a good start. But you also need to get organized, figure out how much you can afford to pay each month, etc.
- Take Notes: Negotiations will run smoother if you are immediately up to speed from phone call to phone call.
- Make Them Aware of Their Risks: If you can’t pay, they can’t get paid. Make sure your lenders know that, in a cordial fashion of course.
- Don’t Pay Less Than the Minimum: Paying less than the required monthly minimum before you’ve agreed to the terms of a debt management plan won’t stop delinquency from progressing, so it’s best to wait until you have enough saved up.
