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What happens when you drop out of a debt management plan

By

Credit Smart
Credit Smart columnist Susan C. Keating
Susan C. Keating is the president and chief executive officer of the National Foundation for Credit Counseling. Prior to joining the NFCC, Keating spent 29 years in financial services. She was the highest ranking female CEO of a U.S. bank holding company, serving as president and chief executive of Allfirst Financial Inc., the largest U.S. holding of AIB Group. She currently serves on Bank of America's National Consumer Advisory Council and is a board member of the Council on Accreditation. Keating also participates in the Financial Regulation Reform Collaborative, a nonpartisan group committed to finding solutions for reforming financial services regulation.

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Question

Dear Credit Smart,
I have a lot of credit card debt, I am in a debt management program but I am working part time. What can happen if I just stop paying? – Meline

Answer

Dear Meline,
A debt management program (or plan, often referred to as a DMP) is generally designed to get consumers out of debt in five years or less. For those with a lot of credit card debt, that time frame is usually shorter than the time it would take to pay the debt on their own. Since you say you do have a lot of credit card debt, this may be one reason you signed up for the program in the first place. But five years is still a long time and sometimes circumstances change as they have for you now that you are only working part time.

I can’t tell from your question how long you have been on your plan, but if you are thinking of stopping payments now I would guess you still have quite a bit of time left. When you signed up your interest rates were very likely reduced and your payments may have also been reduced. DMPs are administered mostly by nonprofit consumer credit counseling agencies. These agencies already have agreements in place with most creditors to reduce interest rates and in some cases stop late fees or over -limit fees.

There are usually monthly fees associated with debt management plans, but those fees are generally less than what a consumer can save with the interest reductions offered. Your access to credit accounts was probably shut off, but it is important to understand that your accounts were not taken over by the agency administering your plan. These are all still your accounts and you will still owe the debt, whether you are on a DMP or not.

If you stop making your payments to the agency, your contract with them will simply end. You will not be liable for your monthly fee to the agency. However, what will happen is that your interest rates and any other concessions will revert back to what they were before your joining the program. And your credit card companies will still expect to get a monthly payment from you. If you don’t pay or are late with your payments, you will likely also incur late fees. You will certainly be getting calls from them to find out when you will be making a payment. If it goes unpaid long enough, the debt could be written off by the credit card company and sold to a third party debt collector. It will not just go away, at least not for a very long time depending on your state’s statute of limitations on debt collection.

Before you simply stop making payments, I would advise you to call your credit counselor and tell them what is going on with you. The counselor may talk to you about selling any assets you have to pay your debt or to seek additional employment to bring in more cash for your debt payments. If your part-time situation is temporary, these measures might bring in enough extra income to continue on your debt management plan. After speaking with your counselor you may still decide to drop out of the program, but you will know what your options are and the best way to move forward.

Remember to always use your credit smarts!

See related: How debt management plans affect your credit, 8 steps to choosing a credit counselor

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Published: November 5, 2016


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Updated: 12-03-2016


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