A debt management plan is formulated to mitigate and settle the debt.
What kind of debt?
- Only unsecured loans like credit card bills and personal loans can be treated with a debt management plan.
- Secured loans like house loans and car loans cannot be settled through a debt management plan. In case the debtor defaults over such loans, the creditor holds legal right over the collateral- house or car as the case may be.
How does a debt management plan work?
- A debt management plan is formulated with the intention of successful settlement of loans. The credit counselor/debt manager takes the responsibility for loan settlement on behalf of the debtor. This does not guarantee that the entire loan will be paid. However, the planner intends to work for the good of both the parties- the creditor and the debtor.
- After negotiation with creditors, the new terms and conditions for repayment are agreed upon by the debtor and the creditor. They try their best that the majority of the debt will be repaid after the waiver and concessions provided in the negotiation. The credit counseling companies set a particular amount that the debtor has to deposit with them on a monthly basis.
- The company shall then use those deposits towards repayment of the debtor’s loan regularly. If the debtor defaults in this case and the credit counseling company is unable to pay off the loan installment on the stipulated date, the creditors shall lose confidence. They may withdraw their waivers and concessions. Now, this would not be a favorable situation.
- Make sure you are depositing your monthly installments with the credit counseling company. Only then, they will be able to help you get out of the debt mess. If you are facing difficulty in saving up for the monthly deposit, you can get help for budgeting your income and expenses. This will increase your chances of the successful settlement of debt. A debt management plan has its own set of pros and cons. Let us have a look at them.
PROS OF A DEBT MANAGEMENT PLAN
- You get finance advice from a professional.
- You receive waivers and concessions as per the negotiation between the creditors and the credit counselor.
- The debt gets settled sooner as some of the loan is waived off.
- You will be more organized in your repayments.
- Debt Management Plan gives you a sense of accountability as you need to make a monthly deposit with the credit counseling company.
- Fewer calls from creditors. These are the pros of a debt management plan as shown above.
CONS OF A DEBT MANAGEMENT PLAN
These are the cons of a debt management plan as given below.
- It is not meant for every type of loan.
- The credit counseling company charges a fee for its services. It can be high or low depending on the company.
- Going for a debt management plan means you will have restricted access to credit card usage, only important and emergency transactions may be allowed.
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FAQs
What are the pitfalls of a debt operation plan?
You may find they are overbalanced by the benefits, but it’s important to be apprehensive of them. You may pay further interest.
1) A DMP can reduce your credit standing.
2) You can get a dereliction.
3) Some DMP providers charge a figure.
Will a DMP affect my bank account?
In conclusion, a Debt Management Plan( DMP) doesn’t directly affect your bank account. You can generally continue using your current bank account as usual when you enter a DMP furnishing that you don’t wish to include a debt on your DMP that’s with your bank account provider.