For about 25 percent of those who turn to credit counselors, more than advice is prescribed. In these cases, in addition to an action plan, a debt-management plan is recommended. A debt-management plan (sometimes called a debt-repayment plan) involves the agency as an intermediary (for a small monthly fee it handles both communications and payments on your behalf) and it includes revised payments that:



A) Are acceptable to all your creditors.

B) Leave you enough money to handle your living expenses.

C) Generally get you out of debt in two to five years.

Such plans include: an alternative to bankruptcy, debt consolidation, or an interest-rate-reduction plan. All these descriptions have been attributed to debt-management plans. In fact, debt management plans offer all these benefits - and perhaps a lot more. Here's how: When creditors realize that you can't meet the original terms of your credit cards or other loan agreements, they also realize that they're better off working with you through your credit counselor. Under a debt-management plan, your creditors are likely to be open to a number of solutions that will be to your advantage. These include:

A) Stretching out your payments so that the combination of principal (the amount you originally borrowed) and interest will pay off your balance in 60 months or less.

B) Changing your monthly payments to an amount you can afford to pay.

C) Reducing your interest rate and/or any fees associated with your loan.

D) Stopping creditors from hounding you day and night.

Why would creditors be willing to do all these things for you? Because if they don't do some or all of them, and if you really can't make the payments, you'll file bankruptcy - and your creditors will never get their money.

The critical point here is that the creditor has to believe that you can't make the payments as agreed. But how does the creditor believe that without staking out your house or apartment to verify that you aren't drinking Champagne and driving a new Corvette? The creditor generally takes the word of the non-profit credit-counseling agency you've gone to for help.

Sounds like a good deal: lower interest rates, smaller payments, and all. Well, the debt-management plan isn't a free lunch. The minuses may include the following:

A) A possible negative impact on your credit report (although just being in a debt-management plan does not affect your FICO score)

B) An increase in interest rates (unless you pay in full and through the credit-counseling agency you originally signed up with)

C) Restricted access to credit during the term of the plan

D) Difficulty in changing credit-counseling agencies after you begin a debt-management plan

The bottom line is this: If you're in debt crisis or you're concerned you may be getting close to it, a debt-management plan from a good credit-counseling agency may be just the solution. If you're just shopping for an interest-rate reduction or a consolidation-loan alternative, a debt management plan may not be in your best interest.