Stop me if this feels familiar: You’re buried under mountains of debt. You’re living paycheck-to-paycheck. You’re fending off collections calls. You can’t see a way you’ll ever get ahead. And you’re tired of living this way.
Are you ready to start Paying Yourself instead?
Chances are you’ve seen at least one ad for a debt management program. And perhaps you’ve wondered, “Could this be the way I can finally get on top of my finances? Or is it just a scam?”
Today we’ll look at what a debt management program (DMP) is, whether it could be right for you and what other options you may want to consider before signing up for a DMP.
The Debt Management Program Experience
MindShift.money Managing Editor Erin Martell is a debt management program success story. She and her husband found themselves in roughly $100,000 of debt during their marriage. Erin was familiar with the concept of the DMP, but had been discouraged from signing up by a family member who didn’t like the concept. But after paying the minimums for several years, they realized that, at the rate they were going, they would be in debt forever. Although they had never been late with a payment, there was no end in sight. They decided to ignore the advice, chose a program and moved forward. “I’m so happy I did,” shares Erin. “I was out of debt in 60 months and have been debt free ever since.”
A debt management program is typically run by a non-profit, credit counseling organization. When you sign up for a DMP, a certified counselor will review your financial situation, offer advice and educational materials. But most importantly, they act as a liaison between you and your creditors. Your counselor is your advocate in negotiating lower interest rates, reducing your required monthly payments and minimizing fees.
How A Debt Management Program Works
Your counselor will design a customized debt repayment plan allowing you to make a single monthly payment to the counseling organization. The organization distributes that money directly to your creditors. You don’t have to do a thing! If you have trouble sending payments on time, you’ll love this feature.
Debt management programs typically require three to five years to get you completely out of debt. The payment terms they negotiate require you to stay in the program until you’re done. But you’ll be motivated to keep going as you see the balances on your cards go down.
Reputable counseling organizations charge very little for their services—a minimal set-up payment and a small, monthly maintenance fee. And participating in a DMP generally requires that you close all of your credit card accounts. If you have too much debt to handle by yourself, but aren’t in a position to declare bankruptcy, giving up your cards might be more than a fair exchange for finally improving your credit and getting out of debt.
But if a debt management program sounds too extreme—of if your debt is limited to a single card—there’s a secret program creditors offer to help out customers. But you’ve probably never even heard of it.
A Little-Known Alternative To Debt Management Programs
Your credit card company has an unadvertised program aimed at getting cardholders out of debt. Why? After all, your card issuer makes money off of you when you pay out loads of interest. But the company loses money if you give up on paying entirely or if you declare bankruptcy out of desperation.
And that means you have more power than you realize to hammer out a deal with your creditor. These deals usually come in the form of what the card company calls a hardship program or a credit card payment plan.
The process goes something like this:
- Call your creditor. Dial the number on the back of your card, and tell them you’re interested in signing up for the hardship program.
- Tell your story. Once you’re connected with the appropriate representative, make your case. Your creditor will be most likely to work with you if they believe you’re struggling just to make the minimum payment, and that you’ll hold up your end of the deal on a payment plan. They may not want to negotiate if they think you’ll continue to spiral into debt. But they might listen if you’re experiencing a temporary financial set-back—a lost job, a major medical expense, etc. Be polite, and—if you get denied—try calling back a little later.
- Discuss the details. The specifics of the hardship program vary across each card issuer. In general though, they may offer you a lower interest rate, a reduction in fees and/or a lower monthly payment. In making these concessions, your card issuer relieves you of some of the burden of interest and fees so you can pay off your balance more quickly without racking up additional penalties.
No matter which path you choose, don’t be afraid to admit you need help. “There are negative stereotypes preventing people from getting help,” says Erin, who put off her application to a debt management program for years before finally signing up.
If you’re sliding deeper into debt every month or struggling to dig yourself out, start exploring your options. With the right program, you may finally be able to conquer your debt, invest in yourself and gain your Freedom.
Community Question: Have you participated in a program that’s helped you pay off some big debts? Share your story with the Financial Foundations community!
Dr. Tony is the co-founder of MindShift.money and the best-selling author of three books on personal and business finances. Having achieved Financial Freedom at 27, Dr. Tony believes that through Financially Fit Bootcamp and Cash Flow Cure everyone can get there. He has made it his life’s mission to help others live a life where their money works for them—not the other way around.