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What is a Debt Management Plan?

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  • Written By: Autumn Rivers
  • Edited By: Andrew Jones
  • Last Modified Date: 03 November 2016
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A debt management plan is a way to pay off unsecured debts that may seem out of control, as the debtor cannot pay bills on time, and thus needs the help of an official plan. The main benefit of a debt management plan is that it typically involves lower payments to creditors, as debt management companies can usually persuade them to reduce debts and eliminate late fees if debtors begin paying soon. The debt is often made up of personal loans, bank overdraft fees, and credit cards. Since these types of debts usually increase over time due to interest and late fees, it is usually the goal of the debtor to start paying them off as soon as possible in order to restore their credit rating and become free of debt.

In general, only unsecured debts are usually eligible for a debt management plan. This typically includes store cards, bank overdrafts, personal bank loans, medical bills, and general credit cards. Secured debts, such as mortgage loans, utility bills, and rent payments are not usually eligible for debt management plans since they cannot typically be reduced through companies specializing in this field. Debtors hoping to reduce the amount of secured debts are usually encouraged to talk directly to their creditors, instead, such as their mortgage lender or landlord.

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Many companies that create management plans for customers are able to reduce either the monthly payments, or the total amount owed. This is because they often have experience convincing creditors that they should accept a lower amount, or else risk not getting paid at all. For this service, the typical debtor interested in a debt management plan can expect to pay a monthly fee to the company. In fact, most debt management companies require their customers to pay them a lump sum every month, most of which they put toward the unsecured debts, while keeping a percentage for themselves.

It is considered the responsibility of the debtor to send their monthly payment on time to the company managing their debts. They should also keep track of their credit report and monthly statements from creditors to ensure that the bills are in fact being paid by the debt management company. Unfortunately, unscrupulous companies may sometimes create a debt management plan with their customer, and then make payments late to the creditors, fail to make payments at all, or even go out of business. Despite the fact that this is not the fault of the debtor, it could still hurt his or her credit, which is why it is important for them to take the time to choose a reputable company, and meticulously keep track of their financial situation.

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