4 reasons people give for not signing up for a debt management plan and why they may be making a mistake
We’ve all heard motivational stories of people who have been in financial trouble, then pulled themselves up and are now wildly successful. While these stories are inspiring, not everyone has the means or the support to do the same.
When people get in financial trouble, they often contact the Financial Counseling Association of America (FCAA) for help. One of our member agencies can review their unique situations and make recommendations, giving them pathways out of the financial holes.
One of the tools our credit counseling agencies commonly use to help people in debt is a debt management plan. Debt management plans or DMPs may combine multiple debts – like credit cards or personal loans – into a structured repayment program with a lower, single monthly payment. DMPs are generally set up and managed by a credit counseling agency (CCA), like FCAA’s members.
Many people make their way to financial freedom through a DMP each day. Others choose riskier, more difficult routes like debt settlement or borrowing money and stressing family relationships.
Why do some choose a more difficult path? This article explores four reasons people say no to a debt management plan and why those reasons often leave them in financial trouble.
1. “I cannot afford the reduced payments a debt management plan requires.”
We live in an economically challenging time where many people are wrestling with debt.
“[Our] clients are still experiencing a post-COVID financial hangover. The assistance (student loans, rental, stimulus, etc.) has dried up, but many clients have struggled to rebuild their income to pre-pandemic levels,” said Lara Ceccarelli, Credit Counselor at American Financial Solutions. “They’re carrying debt accumulated during periods of reduced income or unemployment.”
Fortunately, there are options when people need help with debt. Lisa Ohnemus, Director at Consumer Credit of Des Moines explained that when someone believes they cannot afford a debt management plan, credit counselors are trained to find ways to help.
“We will first reevaluate the budget, looking for areas where the client can cut expenses or increase income to make the payments more manageable,” Ohnemus said.
Anissa Schultz, Director of Enrollment and Client Care at Credit Advisors, agreed.
“If we can suggest spending habit changes that create room in the budget, this is the place to start,” said Schultz. “If the budget is already tight, temporary increases to income, such as a second job, may bring some relief until the debt is paid down.”
CCAs work with consumers’ creditors to find ways to make their clients’ payments affordable for them.
“Some creditors offer hardship programs for clients with negative budgets,” shared Ohnemus.
2. “I do not want to close all of my credit cards.”
Many people in financial trouble are hesitant to close all their credit cards to enroll in a debt management plan, even though they are indebted to the card company.
“They fear giving up the security of having the card(s), even though they are paying huge interest rates,” said Ohnemus.
When you enroll in a debt management plan, every card included in the plan must be closed. But why?
To create a debt management plan, your CCA works with your credit card companies to negotiate lower interest rates. These lower rates save you money on interest and ensure the creditor is repaid. However, in return for lowering the interest rate, creditors require you to close your cards. This ensures you use the lower rate to get out of debt, not go on a shopping spree.
Some CCAs recommend keeping a credit card with no or low balance in case of emergencies. You will be strongly advised not to use the card, though. Creditors involved in the DMP will be actively monitoring your spending. If you accrue more unsecured debt on that card, they may ask for it to be closed.
“We usually recommend that consumers not enroll the card that has the most available remaining credit, depending on the creditors involved,” said Martin Lynch, President of the Financial Counseling Association of America and Director of Education for Cambridge Credit Counseling.
But, many people in financial trouble do not need to keep a credit card open if they follow their credit counselor’s advice.
“Most bank accounts come with a debit option, so a credit card is not necessary,” said Schultz. “At the end of the day, debt is debt and we want to tackle it all!”
“Closing your credit cards can be scary and feel risky, but the overall benefits of the DMP and achieving financial stability outweigh the loss of credit access,” said Ohnemus. “We discuss building an emergency fund to provide a safety net in case of emergencies.”
3. “I need to have a credit card in case of an emergency.”
Emergency situations do happen. Some emergencies are short-term issues, like getting a flat tire. Others can be a long-term problem, like loss of income.
“This is why emergency savings funds are so important and why we urge consumers to create them,” said Lynch.
Not everyone has an emergency fund when they enroll in a debt management plan, but building one over time is wise. Emergency savings allow people to tap into money they already have set aside rather than borrow funds from a high-interest creditor.
If you choose to leave a credit card off of the DMP for emergencies, paying off the card as soon as possible is a high priority.
“If it’s a more serious, long-lasting emergency, like a loss of income, you should contact your counselor,” advised Lynch. “Individual accounts can be removed from the DMP, but that will worsen the situation, not improve it, because the creditor could restore the rates and fees being assessed prior to the creation of the plan.”
The CCA will also advocate with creditors on your behalf.
“The client’s creditors will be evaluated to see if the client can miss a payment,” said Ohnemus. ”If the problem lasts over a month, some creditors offer a program called EMS. With EMS, we can send lowered payments to the creditor during their hardship while still keeping them on a DMP. Credit counselors can also review the client’s budget to help them build emergency savings into it.”
4. “Debt management plan payments seem too high compared to a debt settlement plan.”
This is one reason people in financial trouble may take the hard road and choose debt settlement. It may be appealing on the surface, but debt settlement often brings collection calls, late fees, potential litigation and even tax liability.
While debt management plans and debt settlement both depend on the amount of debt the person has, the costs and outcomes can differ significantly.
“The biggest difference is that credit counseling agencies work with the consumer’s creditors and secure approvals for the accounts that are enrolled,” said Lynch.
Your monthly payment on a debt management plan will vary based on your debt, but your credit counseling agency fee is normally minimal – generally $30 or less. At the end of your plan, you will have paid your debts in full and can walk proudly into financial freedom with new, healthy financial habits.
“Debt settlement companies require you to sever ties with your creditor and miss payments since creditors won’t settle a current account. While you’re missing payments and setting aside money to propose a settlement, your credit is damaged, and you can be sued at any time for the full balance owed,” said Lynch.
Debt settlement companies are prohibited from charging customers until an account is settled. However, you will pay the bank a convenience fee to set up the trust account where you will deposit funds toward the potential settlement.
“If an account is actually settled, you’ll pay a hefty amount to the settlement company, typically either 15% to 20% of the debt at enrollment or between 25% and 40% of the amount you supposedly ‘saved’ by settling. There is often very little saved through for-profit settlements unless the consumer has lots of money available when they initially call the settlement company,” warned Lynch.
Debt management plans are a good way to get out of financial trouble
Living in debt and falling behind on payments is a miserable, stressful way to live. There are many ways to get out of debt, but it is important to choose wisely for the best outcome for you and your family.
Don’t let any of these reasons hold you back from financial freedom. Take the first step by trying FCAA’s Debt Freedom Tool to create a budget or by contacting an FCAA credit counseling agency today.