There are individual financial institutions that offer debt management programs to help debtors pay their debts faster and easier. Companies that run these programs work hand in hand with the creditors to make sure you repay your debts like medical fees, credit card debts, unsecured loans, and collecting debts.
How do they work? It’s simple. A debtor will have to pay a certain amount monthly to an account run by the debt management platform or company. The company will then use the money to pay all of the debt from creditors under the plan.
Debt management programs typically run for about three to five years by regularly making monthly payments to all your creditors. Also, companies that run DMPs profit from this by adding interest to your monthly payments that will serve as a fee to their services.
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Pros of Debt Management Programs
Here are the advantages of enrolling in a debt management program:
Lesser Debt
One of the selling points of debt management plans is their ability to negotiate the lowest interest and easiest repayment terms for you. An explanation will be made on your behalf, which will be given to the creditors, prompting them to lower your interest rate and others. However, this is not all assured since the creditor will have the last say. This means that if they opt not to cooperate with them, things will stay as they are.
But, if the program manages to convince your creditors, especially to lower your interest rate, your debt will be less. Also, the plan will be able to pay off the principal amount with your monthly payment, instead of it going to the interest. A debt management program’s goal is to lessen your debt and to pay it as soon as possible for three to five years.
One Monthly Payment
If you are struggling to make ends meet by paying off multiple accounts every single month, then subscribing to a debt management program will be beneficial for you. Instead of paying in multiple accounts monthly, you will only make one single payment every month if you enroll in a DMP.
The DMP will make an account where you can pay monthly. DMP will then use that money to pay the creditors themselves. This will be less of a hassle for you since you will only have to worry about a single monthly payment instead of keeping track of the calendar to remind yourself to pay a lot of accounts in their due dates.
No Phone Calls
A lot of people agree to the fact that most creditors are annoying since they regularly call you and harass you to stick to the monthly payment now and then. You can’t blame them, though, as calling the debtors to remind them of their schedule is the best way to get a hold of them.
With DMPs, an advisor will be taking charge of these transactions for you. This means that you will not be getting phone calls always since they are in charge of paying the creditors, not you. Also, if you think the creditors are taking things too far, a specialist in your DMP will settle the transaction directly.
Cons of Debt Management Programs
Debt management programs also have their fair share of drawbacks such as the following:
Closing of Accounts
Probably one of the most significant drawbacks of a debt management program is the need for you to close all your accounts except for one. This single remaining account will be left open but will only be used in cases of emergency. This is their way of ensuring you do not take any more debt, which will make your subscription longer than expected.
Negative Impact on Your Credit
DMPs default on your debts on your behalf and then renegotiate them for easier repayment terms. Creditors will not be happy about this since they will be losing a significant amount of money in return. This might prompt them to blacklist you in their financial institution.
Also, these defaults will be seen by other companies, which will be a disadvantage if you are looking to apply for a new credit line or loan in the future. Once this happens, you will have no choice but to apply for loans through bad credit loan lenders only.
No Legal Protection
The absence of legality of DMPs has its benefits, especially the lack of evidence of being insolvent in your accounts. However, this lack of legitimacy also has its own downsides. DMPs are not legally binding, meaning you can exit the program quickly. This also means that your creditor may also choose to leave.
This can prompt them to make an investigation of their own, finding proof of your insolvency in your debt. The lack of signs of you being insolvent is one of the most common reasons creditors leave the program.
Everything that you have agreed on the terms and conditions in the program will be revisited, so making sure you keep your creditors satisfied by sticking to your monthly payments is the best move to avoid them leaving the program.
Takeaway
Before subscribing to a debt management program, make sure to secure your assets, establish an emergency fund, and look through all the pros and cons. There might be a lot of selling points in subscribing to a DMP, but the lack of legality in DMPs is one of the most common reasons people opt not to.
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