Debt Management Plans: 10 Things to Know

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Credit counseling services work with credit card companies and consumers to resolve excessive credit card debt. Here is some general information about credit counseling services.

1. Credit counseling helps with debt management: Credit counseling services work with you and your creditors to reach affordable repayment terms and to develop a cash-based budget. If you're in severe debt, your credit counselor may advise you to enter into a debt management plan.
2. Reducing and/or eliminating interest charges and fees: High interest rates, late fees, and over-limit fees can rapidly escalate credit card debt. Credit counseling services can negotiate reduced interest and fees. Credit counseling services do not reduce debt amounts, though.
3. Roll credit card payments into one monthly payment: If you enroll in a debt management plan through a credit counseling service, you'll work out a monthly amount that you pay toward your debt; they will deduct a monthly service fee. The agency then distributes the balance to your creditors according to your repayment agreement.
4. Repayment plans available for up to five years: Creditors are generally willing to accept repayment agreements lasting up to five years, which assists with providing affordable repayment terms.
5. Debt management plan terms, charges and due dates provided in writing: Credit counselors provide written copies of your repayment schedule, due dates, amounts, costs and other details. You'll be asked to sign the repayment plan. Ask any questions before signing your debt management plan agreement.
6. Closing all credit card accounts often required: Credit card companies may require consumers to close credit card accounts as a condition of their debt repayment plan; this depends on the credit card issuer.
7. Credit counseling and debt management plans cannot "fix" bad credit occurring before your repayment plan: Beware of credit solutions offering to "fix" or "eliminate" bad credit. Legitimate credit counseling services cannot change credit reporting, but you should see your credit scores gradually increase as your debt is repaid.
8. Plans shown "paid as agreed": Payments made during your debt management plan are often shown on credit reports as "paid as agreed" but may show less than minimum payments. Verify with your credit counseling service how your payments are reported on your credit report.
9. Credit counseling services cannot guarantee eligibility for future credit: It's important to understand that credit counseling services and debt repayment plans cannot guarantee your eligibility for future credit.
10. Debt management plan useful for avoiding bankruptcy: Paying off debt through a debt management plan can help you avoid bankruptcy, which can appear on your credit report for ten years.

Becoming debt-free is well worth the time and effort you invest in your debt repayment plan.

Karen Lawson is a freelance writer with extensive experience in mortgage banking and home loan loss mitigation programs. She holds BA and MA degrees in English from the University of Nevada, Reno.