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Understanding Debt Management Plans with O1ne Mortgage

If you’re struggling with debt and consolidation isn’t an option, a debt management plan (DMP) can help you pay down your debt over time, often with lower payments and interest rates. However, because a DMP may involve paying less than what you originally agreed, lenders may not always agree to the terms. If that happens, here’s what you need to know.

How Does a Debt Management Plan Work?

If you’re having trouble managing your debt, a credit counselor can provide personalized advice. In some cases, the counselor may recommend a debt management plan. A DMP is a debt repayment plan that typically lasts between three and five years. The credit counseling agency will negotiate your unsecured debt, such as credit cards and personal loans, with your lenders. This may result in a lower monthly payment, a lower interest rate, or both on multiple credit accounts.

Throughout the DMP, you’ll make your monthly payment to the credit counseling agency, which will distribute the funds to your creditors. In exchange, you’ll typically need to close your credit cards and agree not to apply for more credit until you’ve completed your plan. DMPs usually require a modest setup fee, as well as an ongoing monthly fee. It’s important to work with nonprofit agencies to avoid excessive fees. You can find a nonprofit credit counseling agency through the National Foundation for Credit Counseling or the Financial Counseling Association of America.

Do Your Lenders Have to Accept Your DMP?

While a DMP can provide relief, lenders are not legally obligated to agree to them. Potential reasons for refusal include:

• Unwillingness to accept the terms of the DMP.
• Disapproval of your credit counseling agency, especially if it’s a for-profit agency.
• Belief that they can collect the full amount you owe another way.
• Belief that you can afford to pay more than you’re proposing.
• Failure to minimize discretionary expenses.

Some creditors may explain their reasons for rejection and offer suggestions for changes to your proposal. Depending on the circumstances, you may be able to come to an agreement with some adjustments, such as agreeing to a higher monthly payment or interest rate, or providing more evidence to show that you can’t afford to keep making payments as originally agreed. If a lender rejects your DMP or requests changes, consult with your credit counselor to determine your next course of action.

What to Do if Your Lender Rejects Your DMP

If one or more lenders reject your DMP and refuse further negotiations, here are some steps you can take:

• Continue making payments. Stopping payments can seriously harm your credit score and lead to more dire consequences, such as your debt being sold to a collection agency, which could sue you for payment.
• Continue paying other debts. If some creditors have agreed to your DMP, the reduced monthly payment could free up enough cash to keep up on your debts that weren’t included.
• Ask about other relief options. Contact the lender that rejected your DMP and inquire about other potential options for relief, such as short-term forbearance, a hardship program, or debt restructuring.
• Look for ways to increase your income and cut your expenses. Review your budget for potential areas to pare back and seek opportunities to make more money.

Whatever you do, be sure to speak with your credit counselor to explore all of your options before you proceed.

Track Your Credit Score Throughout the Process

Being on a DMP won’t hurt your credit on its own, but certain aspects of the process can impact your credit score. For example, closing credit cards could cause your credit utilization rate to spike, which can damage your credit score until you pay down your debt. Because a DMP can impact your credit, it’s important to monitor your credit score regularly to track your progress as you work to pay down your balances. With Experian’s free credit monitoring service, you’ll get access to your FICO® Score and Experian credit report. You’ll also receive real-time alerts when updates are made to your credit report, making it easier to address potential issues as they arise.

For any mortgage-related needs, call O1ne Mortgage at 213-732-3074. We’re here to help you navigate your financial journey with confidence.

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