Money Advice

How to Clear Your Debt by Leveraging a Debt Management Plan

Debt is an ever-increasing problem that can slowly take over everyday life. Fortunately, there are many things that you can do to get out of debt, and once you do, to stay out of it. One of the most effective (and most straightforward) ways to get out of debt is to leverage the power of Debt Management Plans (DMPs).

If you’re wondering how to use a DMP, we’ve got you covered. Here are a few things to consider when using a DMP and how you can quickly get out of debt by leveraging one.

What is a Debt Management Plan (DMP)?

A Debt Management Plan (DMP) is a repayment strategy that allows you to pay off your credit card debt under a single, easy-to-make payment instead of multiple payments with varying interest rates. If you’ve found yourself in over your head with debt to the point that you’re considering filing for bankruptcy, you may want to try a DMP first as it can prevent the lasting damage bankruptcy causes to your credit score.

Before you begin reaching out to the credit card or loan companies you owe debt to for a DMP, there may be a better way that will affect your credit score less and maintain a better relationship with your creditors. Start by using a debt paydown calculator to see if there’s a way you can get out of debt on your own. You might be surprised by how effective these calculators are, giving you a complete picture of what your situation looks like and the small steps you can take to become debt-free.

A DMP can help get you out of debt, but only if you’re willing to stick to it. If you keep adding on more credit cards or loan debt, then you’ll only make the problem worse. There’s also no guarantee that your creditors will accept a proposed DMP, so it should only be used as a last resort before doing something drastic such as filing for bankruptcy.

The pros and cons of using a Debt Management Plan

A DMP can help you get out of debt and doesn’t have the same kind of negative effect on your credit rating as a bankruptcy would. However, it might not be the best option for everyone.

The things you need to consider before using a Debt Management Plan

There are several disadvantages to signing up for a DMP. For one thing, it can be challenging to get approved for a debt management plan if you have high levels of income or assets. Your creditors will see your financial situation as less desperate than you’re depicting it and may reject your proposal outright.

Another thing to consider is that DMPs are not always in your best interest in the long run because they often involve high monthly payments and make it almost impossible to qualify for loans or credit cards in the near future. You’ll most likely need to wait for it to fall off your credit history which could take up to a decade.

How to use a Debt Management Plan to get out of debt

If you’ve decided a debt management plan is the best way forward, here are the steps to take to use a DMP to get out of debt.

Step one

For a Debt Management Plan to be successful, you’ll need to have a full picture of what your financial situation looks like. Start by collecting all of your outstanding debts, your sources of income, and a list of any assets you own.

Step two

Next, you’ll need to reach out to your creditors to establish a plan. Contact their debt management departments and ask to speak with a manager. You’ll need to do this for every creditor unless you instead opt for a debt consolidation loan.

What happens if you’re approved for a DMP

If approved, you’ll begin making monthly payments to your creditors on a set schedule. Your payments will typically be taken via ACH withdrawal on a certain date every month. You might be able to have this date changed after a few payments, but in the beginning, it’s best to just stick to the defined schedule.

Your DMP will include a strict budget you’ll adhere to in order to pay off your debts. If there’s any cash windfall that comes your way, you’ll need to contact your creditors to let them know so you all can strategize how best it can be used. This might feel unfair, but remember that your goal is to get out of debt as quickly as possible.

Should you pay off your DMP early?

If you have an increase in income, don’t automatically make additional payments to your DMP, as this can make your creditors think your finances aren’t accurate. Reach out to them to let them know you’ve had an increase and need to re-evaluate the budget. The more open you are with them, the better chance you’ll have that they’ll be flexible with your payment structure.

Finally, remember that this will take time. You most likely didn’t fall into debt quickly, so expect getting out of debt to take longer than you’d hope. It’s more important that you’re taking action by consistently adhering to the DMP than pretending the problem doesn’t exist.

The bottom line

In summary, if you need to clear your debt quickly, talk to your creditors about setting up a debt management plan. While it can be challenging to get your creditors to agree to participate at first, it’s worth the effort. Keep this guide handy when you’re ready to get started so that you can get out of debt as quickly as possible.

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