Did you know that the average American household has a debt of about $155,622? This amounts to more than $15 trillion nationwide.
Sure, taking out a mortgage, for example, is an excellent way to get started on the path to financial stability and riches. However, accumulating too much debt might make you unable to see a clear route to financial independence.
Those suffering from credit card debt might benefit from debt management programs (DMPs) or an IVA offered by credit counseling groups. If you’re unfamiliar with what is a DMP, or an IVA for that matter, no worries, you’ve come to the right place.
Keep on reading for our full breakdown of both concepts and how they work as solid debt solutions.
What Is a DMP?
Credit counselors can set up and administer a repayment plan known as a debt management plan. To help individuals better manage their money, many credit counseling firms are non-profit organizations.
In a credit counseling session, you’ll sit down with a counselor to go through your financial position and discuss your choices. DMP counselors may work with your creditors on your behalf to develop new payment arrangements if a DMP is a suitable match.
If you accept a debt management plan, creditors may waive fees and cut interest rates on your accounts. The purpose of most DMPs is to pay off your debts in three to five years or less, which is more straightforward to achieve when interest charges are kept to a minimum monthly.
You will send a single monthly payment to the counseling organization, which will subsequently distribute the money to your creditors once you’ve signed up for the DMP. The agency may charge you a modest monthly fee for this service, but the money you save on interest may make up for it.
The only accounts that may use DMPs are those that do not have any collateral backing them up, such as credit cards. When it comes to your debt management plan, you’ll have to cancel all of the credit cards parts of your DMP.
How Does a DMP Affect Your Credit?
Having a DMP or working with a credit counselor will not affect your credit ratings.
Your credit report may show that you are working with a counselor or utilizing a DMP, and this can affect your credit in numerous ways:
Closing Accounts Leads to Higher Credit Utilizations
A person’s credit usage ratio measures how much of their available credit on revolving accounts (such as credit cards) they are utilizing each month. Your results will improve if you have a lower usage ratio.
If you leave other non-DMP credit card accounts active, closing credit cards might reduce your available credit and lead to a higher usage ratio.
Your precise financial circumstances and the sort of credit score you have will determine the exact effect. Closed accounts with a balance are excluded from usage calculations in specific scoring models, but some like FICO may include them.
Timely Payments Develop Positive Payment History
You will be able to make timely payments on all the debts included in your DMP if your creditors agree to re-age your past-due accounts and bring them up to date. Good payment history is the most significant component in determining your credit score.
Paying off Debt in Full
Even if you save money by using a DMP, you’ll still be responsible for paying off your debts in full at the end of the plan’s term.
To improve your credit, you may want to avoid settling debts for less than they are owed.
The Benefits of a Debt Management Plan
It is possible to pay off your obligations using a debt management plan (DMP) in a reasonable amount of time, generally no more than ten years.
Your creditors don’t have to agree to a DMP, and they aren’t obligated to cease contacting you since it is an informal arrangement. Creditors often accept your payments and agree to lower or eliminate interest and fees while you pay them via your DMP plan, though.
What Is an IVA?
You might settle all or a portion of your debt via an IVA. An insolvency practitioner will distribute your money among your creditors if you agree to make monthly payments to them.
In contrast to bankruptcy, you retain greater control over your assets with an IVA.
Unaffordable debt might necessitate entering into an Individual Voluntary Arrangement, or IVA. All remaining unsecured debt is canceled after five or six years of affordable monthly payments.
Most likely, you will not be granted a new mortgage if you have a current IVA that you are repaying. You’ll be in a better position to get a mortgage after you’ve paid off your IVA, but you should still proceed carefully.
People who have had IVAs in the past may be turned down by specific lenders, while others may accept them if the IVA has been paid off and a period has elapsed.
What Is the Benefit of an IVA?
An Individual Voluntary Arrangement (IVA) is a legally binding contract between you and your creditors that allows you to pay off your obligations over a period of five or six years. An IVA lump payment is a way to pay off all of your debt in one lump sum.
Setting up an IVA requires the assistance of an insolvency practitioner, so you’ll want to look into IVA advice online.
As long as you make your payments as agreed, your creditors cannot take further action against you since the IVA is legally enforceable and documented in the IVA registry.
IVA or DMP Security: Understanding the Differences
When you’re at your wits-end with substantial monthly payments for your debts, things can look rather bleak. However, we hope that our guide on DMPs and IVAs showcased how each debt solution works.
But, if you want to learn more beyond what is a DMP, you can head straight to our financial section, where we keep all the extra explainers and strategies.