A Debt Management Program (or Debt Consolidation) is a financial program designed to help organize and pay off high debt more efficiently, paying less interest along the way.
It is a process carried out through an agency or financial institution. The idea is to combine several debts into a single monthly payment, negotiate interest rates, and eliminate late payment fees.
It usually works when you have credit card debts of $10,000 or more and it has become unfeasible to pay them off using methods like the Snowball or Avalanche.
How it works
A debt management program typically lasts between 3 and 5 years, depending on the level of debt and the determined payment capacity. The goal of this program is for the debtor to end on good terms with the creditors, for the credit history not to be affected, and to save on interest along the way.
Financial evaluation
First, a financial evaluation is conducted. A credit counseling agency analyzes your economic situation and determines if the program is right for you. This evaluation is usually free and conducted over the phone.
We invite you to consult with our team before contacting the agency directly; our consultants will clarify all your doubts and will be available to you throughout the entire process.
You can contact one of our consultants via chat or schedule a call through our WhatsApp. It is completely free; if you want to know more about this consulting service, go here.
Signing the agreement
If the Debt Management Program is the best option, the agency proceeds to create an agreement that must be signed by the debtor.
💡 Before signing the agreement, you can consult with the member of our team who initially helped you to confirm that the agreement indeed benefits you.
Single monthly payment
The agency will establish a realistic budget based on the debtor's situation with the intention of determining a single monthly payment.
This single monthly payment exists to make it easier for the debtor to pay off debts, as instead of making multiple payments to different creditors, a single monthly payment will be made to the agency, and then it is the agency that will distribute the funds to the creditors on behalf of the debtor. This is one of the benefits of this program.
However, cards that are enrolled in the program cannot be used. We view this as a positive thing as it prevents over-indebtedness.
Lower interest and waiver of fees
Another benefit is that the agency contacts creditors to obtain better payment terms, negotiating lower rates and eliminating late payment fees. Once all creditors agree, the program officially begins.
Closure of accounts
As payments are made month by month and recorded in the credit report, the score benefits; this is positive. As each card is paid off, it is closed in good standing; this is negative in the short term because a closed account decreases the available credit limit, reduces the number of accounts, and the average age of accounts can drop depending on how long that account had been reported in the credit history.
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Benefits of the Debt Management Program
Simplified payments: A single monthly payment is determined instead of multiple payments to different creditors.
Avoids over-indebtedness: By not allowing the use of credit cards while on the plan, you avoid accumulating more debt.
Less financial stress: Having a clear and structured plan provides peace of mind, and the fact that payments are made every month keeps creditors away from collection communications.
Reduced interest. The interest rate on debts is usually reduced significantly.
Waiver of fees. Late payment fees and other similar charges that have been added to the balance are usually eliminated.
Disadvantages of the Debt Management Program
Program costs: A debt management program usually has a one-time enrollment fee that is paid with the first program payment. There is also a monthly administration fee, although it does not usually exceed $80 a month (generally around $50); this cost usually offsets part of the interest savings. So in the end you still have costs related to the debt, just not related to interest.
You only pay once you are enrolled and you will know in advance how much that amount will be. Remember that you can consult with our team at any time for any questions via our WhatsApp.
Impact on your credit: Although at the end of the program the debtor usually ends up with good credit, during the process the score may be affected from one month to another. Rather than a disadvantage, we consider this a consideration to keep in mind.
Closing of accounts: Undoubtedly the less favorable aspect of this program is that at the end of it, the enrolled accounts will be closed, even though the debt was paid off in full. Our recommendation is not to enroll your oldest card, as that is the one that contributes the most to the average length of your credit history.
Impact on Credit
Of the debt relief programs, Debt Management is the one that has the least negative impact on credit history because in the end the debt is paid in full since it is the interest that is negotiated, not the balances; and payments are being made on all accounts every month.
In the short term it can have a negative impact on the score, as negotiating better terms with creditors (lower interest rates or the elimination of late fees) means that a "modification" could be reflected on the account. However, as the program progresses and monthly payments are made, the positive impact becomes more relevant.
At the end of the program, you usually end up with good credit, and most importantly, no negative marks remain, as is the case with the Debt Settlement program where accounts are reported as "settled", or the 7 to 10-year mark of bankruptcy.
When should I consider this program?
If I have multiple cards with high balances and I am not able to pay them off, this is a program we would consider.
Unlike Debt Settlement or Bankruptcy, a Debt Management program has a much less negative impact on credit, and it is only short-term. In the long term, I would end up with good credit even though I will lose the cards that were enrolled in the program.
That being said, before looking further into this program, I would try to get out of the debt problem on my own using the Snowball or Avalanche method. If even after trying these methods I cannot get out of debt, I would definitely act quickly before the balances get out of control.
Starting to lose control of your finances can be a highly stressful feeling, and if it is getting harder to reduce debt each month, or worse yet, if it is growing, it is probably time to consider a Debt Management program.
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