Mechanics of a Debt Management Plan

Show Notes

• Guests: Chris Kohl, Ted Rossman, Deborah Robinson, and Thomas Nitzsche
• Host: Adam Walker
• Publication Date: August 10, 2023

Highlights

1:09 | Adam and Thomas Nitzsche discuss the basics of debt management plans.

3:45 | Chris Kohl explains why creditors support clients using a debt management plans.

5:10 | Thomas talks through the difference between debt management plans and other debt repayment options, including debt settlement.

8:25 |Ted Rossman shares his perspective on why Americans have such a hard time talking about personal finance.

14:05 | Adam and Ted talk through some ways that someone struggling with debt can get started and make a positive change.

Episode Transcript

Adam Walker: In this season of Long Story Short, we spoke to many people who reached financial freedom through Money Management International. It’s no small feat what the clients of MMI have done and we’ve been thrilled to be able to showcase their stories.

And while many factors go into repaying debt and achieving financial freedom, we want to highlight one in particular on today’s episode: The Debt Management Plan, or a DMP. Throughout this season, we’ve discussed with our guests how a DMP helped them reach their financial goals, and oftentimes, quicker than planned.

In today’s episode, we spoke to four individuals with vast experience in the financial industry to get down to the basics of what exactly this plan is, what it entails, and how Americans can use a Debt Management Plan to take control of their debt to achieve financial freedom. So as we close Season 2, let’s get to the bottom of the Debt Management Plan in today’s episode: “The Mechanics of a Debt Management Plan.”

Let’s start with the basics: What is a Debt Management Plan?

If you’ve been tuning in this season, you have heard from our guests about their journey with a Debt Management Plan. Now, it’s time to hear from the experts in the industry, who are answering those lingering questions you have, such as: Who qualifies for a Debt Management Plan? How is it different from other debt relief programs? And when people are in financial trouble, why do non-profits like MMI suggest a Debt Management Plan to help them?

Thomas Nitzsche: So a debt management program is a structured full repayment of one's unsecured credit card debt through a non-profit credit counseling agency like Money Management International

Adam Walker: That’s Thomas Nitzsche, he’s the Senior Director of Media and Brand and a financial educator at Money Management International. He’s been with the organization for fifteen years.

Thomas Nitzsche: One of the possible outcomes of a credit counseling session, which we provide to about 50,000 consumers every year is a debt management program. About a quarter of the folks that we counsel for credit counseling decide to elect for a debt management program where MMI works with their creditors to get interest rates reduced on their unsecured debt and set them up on a payment plan to be debt free within five years.

Adam Walker: So a Debt Management Plan essentially lowers interest rates and puts the individual on a payment plan. But we wonder, is there any other benefit to using a Debt Management Plan?

Deborah Robinson: It helps you build your credit.

Adam Walker: That’s Deborah Robinson, she’s a Supervisor in the Support Division of Money Management International, who says her passion is helping others become debt-free.

Deborah Robinson: If you do a debt settlement and you just settle on your debts, your credit is gonna take a hit.

Adam Walker: Not only is a Debt Management Plan designed to help you pay off your debt, but it also helps you build your credit in the process, whereas other debt relief strategies, such as debt settlement can hurt your credit… but more on debt settlement in a minute.

Let’s talk about credit score. Is there a minimum credit score needed to access these services? Here’s Thomas again:

Thomas Nitzsche: The beauty of the DMP is that it doesn't require any sort of credit score requirements. So even if you're someone who already has a blemish score, your accounts may have already fallen behind.

As long as you're less than three months behind, I really encourage you to reach out to see what it could do for you, because it can get those accounts rehabilitated back on track. Get those current, get them reporting positive payment history, and get that debt paid off in the interest rates, uh, lowered and your credit score increased over time.

Adam Walker: That’s right, no credit score requirements. Which is great news if you’re someone looking into Debt Management Plans to reach financial freedom. Alright, so we’ve heard from a couple of folks at Money Management International, but what about others involved in a Debt Management Plan?

As Thomas said, the first step of the plan is negotiating with creditors to lower interest rates, making the repayment easier for the borrower. But what exactly do creditors think of Debt Management Plans?

Chris Kohl is a former lending executive who recently retired from JPMorgan Chase after 20 years with the organization. We asked Chris for his thoughts:

Chris Kohl: From a creditor perspective, you know, a debt management program is really the simplest way for, I guess a creditor to, to recover their outstanding debt. It's the least expensive way, and it's also the most efficient way for a consumer to pay back their credit to avoid such things as collection calls and letters, et cetera.

Adam Walker: So when working through a Debt Management Plan, creditors are on your side, after all, they just want the borrower to pay back the debt and are willing to help them get there. But when contacted by an organization like MMI on behalf of the borrower, creditors don’t just lower interest:

Chris Kohl: It gives the customer a lower interest rate. So they have a more affordable monthly payment. The monthly payment is a fixed monthly payment. It's the same amount every month for up to 60 months, and then the customer will also have any fees waived during that timeframe, so they don't see their balance increasing due to late fees.

Adam Walker: That’s right, late fees are waived during this time. Not only is the interest lowered, but the late fees are waived, leaving the borrower paying back significantly less than if they tried to tackle the debt on their own.

Now, remember when we touched on debt settlement? Let’s now take a closer look at that and dive deep into the differences between that and a Debt Management Plan. Here’s Thomas:

Thomas Nitzsche: A debt management plan is different from other debt relief options, including debt settlement and debt consolidation. And it's different in a couple of key ways.

First of all, in a debt management program, we're working with someone's existing creditors. We're not a loan company, so we're not establishing any sort of new line of credit. We're working with someone's existing creditors to get their existing rates lowered to a point where more of their payments going to principal rather than interest so that they're able to see some really good headway and paying down that debt over time.

So a debt settlement is where you save up over time and you offer the creditor a settlement less than the actual balance that you owe. And there are companies for-profit companies that will offer to do that for you, where you make the payments to the debt settlement company. And then after all your accounts are defaulted and in collections, the creditors are willing to negotiate on the balance, not the interest rate.

And then at that point, the debt settlement company attempts to reach a settlement with them in order to consider the debt settled or resolved.

Adam Walker: So a few key takeaways from that: companies that offer debt settlement tend to be for-profit; the payments you make are to the debt settlement company; and the creditors negotiate your balance, not your interest rates.

This is great, but it makes me wonder what kind of debt is best for a Debt Management Plan? After all, debt comes in many forms. Could it be auto loans, student loans, credit card debt, or even medical debt? Let’s hear from Thomas again.

Thomas Nitzsche: So the best type of debt, quote unquote, best type of debt to put on a debt management program is unsecured debt, typically meaning credit cards, retail cards, some personal loans. If it's not secured with property, some medical debt will work with us as well. But for the most part, it's credit cards and retail cards are the most effective types of debt to put into a debt management program.

Because those are the ones that we have established concessions with in order to get the interest rates down so that more of your payment is going to principle rather than interest.

Adam Walker: Ah, yes. Credit card debt. If not managed carefully, credit card debt can snowball, leaving borrowers feeling helpless. Not to mention that with credit cards, come some of the highest interest rates on the market. And although you have the option to make the minimum payment, giving the borrower some relief in the moment, with growing interest, the debt continues to grow.

So to recap: that’s a Debt Management Plan. It’s a structured repayment plan that also helps you build your credit in the process. There are no credit score requirements and credit card debt is the best kind of debt for this plan. Now that we know what it is, let’s dive deeper into the concept of debt. Why is no one talking about it? Let’s find out.

Let’s be real, no one is dying to bring up their debt situation at a party. It’s uncomfortable to talk about, even with those closest to you. There’s a certain shame associated with debt and because of that, you might be hesitant to reach out for help. But why is no one talking about it?

Meet Ted Rossman, a Senior Industry Analyst at Bankrate with over ten years of experience in the financial sector:

Ted Rossman: As Americans, by and large, we are not good about talking about money. We often don't get a lot of personal finance education in school. We often don't get that education at home because a lot of our parents are maybe not great about managing money or not great about talking about money.

Adam Walker: It’s no secret, money is a taboo topic, especially when it comes to the parent-child relationship. And as Ted says, even in school, it’s not usually part of the curriculum and kids and adolescents are not properly educated on personal finances prior to entering their adulthood, leaving them with more questions than answers.

So how can we fix this now? Well, good news: by listening to this podcast, you’re on the right track. Back to Ted:

Ted Rossman: I think that this is one of the key roles that MMI can play. It's like they're this trusted advisor, this, this guru, this parent, this older sibling, this, you know, somebody who's been there and done that and can really help you along the way because it can be a lonely journey paying off credit card debt.

Picture if you owe several thousand dollars, maybe it's even more than $10,000. It's hard to stay motivated over the long haul. You may not even know where to start. You may be overwhelmed. You may be paying a ton of money and interest or feeling kind of hopeless, or maybe bankruptcy is a better option.

It really helps to have this trusted advocate that can guide you through the process, and also has relationships with lenders where they can get your credit card company to. Give you a much lower interest rate and walk you through the process. And I really think having somebody to guide you like that is really one of the biggest advantages of a debt management plan.

Adam Walker: They often say ‘You can’t teach an old dog new tricks’, but the reality is it’s never too late to learn how to be more conscious of your debt, or more importantly, how to tackle it.

Thomas Nitzsche: About 3/4 of Americans don't know that a debt management plan can reduce their interest rate or that credit counseling can reduce their interest rates if they enter a debt management plan. So there's a lot of education that needs to go on as we help people understand their options for dealing with different types of debt.

Adam Walker: So the key to breaking the stigma around debt? Like most things, the key is proper education about it.

Chris Kohl: The main thing that you get with credit counseling is education. Education is the key.

Adam Walker: And that is where MMI comes in. The credit counselors at MMI not only will help you create a Debt Management Plan, but given their vast experience with consumer debt, they can provide financial education to ensure that once you complete your program, you won’t slip back into old habits.

Thomas Nitzsche: I think the credit counseling process and a debt management plan really helps reduce those feelings of embarrassment and shame because the counselors that we have here, the average tenure is about 12 years. So they've worked with a lot of people and they know exactly how to express that empathy.

And many of us have been in the situation that our clients have been in in the past. You know, we've lived through the great recession, we've lived through our twenties. You know, we've all had those financial challenges in our past.

And so, you know, that's the other really big piece of feedback that we get, is that people were afraid of being judged or being shamed for their financial situation. And that just isn't the case when you work with a nonprofit credit counseling agency like MMI

Adam Walker: The counselors understand that financial hardships happen even to the best of us. Many have gone through what you might be dealing with now, which brings us to our final point when talking about the stigma surrounding debt: it’s more common than you think. In fact, everyone that we spoke to for this episode reiterated this. Chris up first:

Chris Kohl: No one should be ashamed of having financial hardship. It happens to every one of us.

Adam Walker: Over to Ted from Bankrate.

Ted Rossman: I think that there is this kind of unfair stigma because let's remember too, about half of credit card holders carry debt. From month to month, and there's no shame in that. I mean, a lot of times it's a very legitimate reason.

We actually find that most people are in credit card debt because of either a one time shock, some sort of big medical bill, home repair, car repair, or something like that. Or it's just every month, unfortunately, there's more expenses than paycheck.

Adam Walker: Thomas from MMI.

Thomas Nitzsche: Common question that we get is, am I the worst you've ever seen? You know, I would hear that all the time, and it's so funny to me because, you know, of course not, you know, and even if you were, it doesn't matter. We're not here to judge. We're here to improve your situation.

Adam Walker: And finally, let’s hear from Deborah at MMI:

Deborah Robinson: You know, we're human too. And some of the issues that the clients are having, we're having to, you know, we have medical issues, we're taking care of family members, helping with grandkids. We are living the life as well.

So when you have that life experience, it's very easy to be empathetic and compassionate to what our clients are going through.

Adam Walker: That’s right, the counselors at MMI are not here to judge, in fact, it’s their passion to help you get out of debt. So now we know what a debt management plan is, why there’s so much stigma around debt and how to break through that stigma.

Now, let’s look to the future. We want to answer your questions, such as how can you take action, and how can you stay active in your debt repayment.

If you’ve gotten this far in the episode, you know that there are always solutions to debt, wherever you may be on the journey, and so we would like to close out this episode by giving you some tips and tricks on how to begin your journey towards financial freedom. Let’s talk about how YOU can take action. Ted Rossman has some advice.

Ted Rossman: We've mentioned that people are not great about talking about money. Even with the people closest to us, we often don't have these conversations with our spouse or our parents or our kids or others close to us. So I really think that step one is just starting to move in that right direction, and I think that that can instantly make you feel better.

Adam Walker: First step - talk to those you love and remember that you don’t have to suffer in silence. As we learned earlier, debt is a common issue and it’s likely that those around you are going through the same thing.

What should people do next, Ted?

Ted Rossman: Make that list. How much do you owe? What are the interest rates? Maybe it is appropriate to work with a group like MMI, or if you're gonna try to do it on your own, there's different approaches.

Ted Rossman: Sometimes people are afraid to look and it's like you're cringing; you're the ostrich putting your head in the sand. You gotta know where you stand.

Adam Walker: Laying it all out is a good way to understand where you stand and if you need help. And remember, it’s okay to ask for help. If you’re in a situation where you do need help, Deborah says that it’s important to ask as soon as possible.

Deborah Robinson: If you find that you are drowning, contact us. The sooner, the better. Sometimes clients wait too late and their account is charged off, meaning the company has written it off. They still owe it, but it's charged off and it's already hit your credit. It's already damaged your credit so much, and then there's nothing the creditor can do really for you. So don't wait too late. If you feel like you're drowning, please call us. Get help.

Adam Walker: Thomas?

Thomas Nitzsche: One of the things that we hear from our clients the most is, I wish I would've known about you sooner. Or, I wish my friend would've told me about you earlier, or I wish I would've gotten over that anxiety that I had or that fear, that, stigma or that shame that I was feeling, or the embarrassment of talking to someone about my problems because I wasn't judged for that. And had I gotten started sooner, I would've been out of debt sooner.

So, it's really important to educate folks as to what their options are so that they can make informed decisions and really experience financial success.

Adam Walker: Now, it’s one thing to connect with MMI, get a Debt Management Plan, and make monthly payments… but how can you stay active in your debt repayment? We asked Deborah:

Deborah Robinson: The main thing that can go wrong being a part of a debt management program is that you just, you don't stay engaged. You signed up for this program, you get my deposit each month, I'm out. That's the worst thing that a client can do. The worst thing - yes, you are giving us control of making the payments to your creditors, but you need to remain engaged.

Remaining engaged means looking at your statements each month, we want you to see the payments that we're sending on your behalf. We want you to see that, you know, this creditor said that they're gonna reduce your interest rate to 6%. We want you to look at your statement and actually see that because the customers are our first, they see the problem first.

Adam Walker: Staying engaged means checking your statements, looking out for errors, and keeping track of your balance. Another thing Thomas suggests? Keeping an eye on your credit score and building a budget:

Thomas Nitzsche: A couple of the things that you can do to improve your financial picture today would include checking your credit score and establishing a budget. Most of the clients that we work with have not done this in quite some time and there's never been more ways or easier ways to get your credit score.

A lot of your financial institutions will offer it through their banking platforms or their online platforms. You can speak to a credit counselor at MMI and they'll provide you with an educational score and review your credit report with you.

You can go through annual credit report.com once a year to access all three. There is a slight buy fee to pay for the score if you go through that channel. But it's never been easier to get your score; and so it's important that you know what's on your report and what your credit score is.

Adam Walker: Both incredible pieces of advice. We hope that after listening today, you understand the fundamentals of the Debt Management Plan and that going forward, you feel more open to discussing debt with those you love, as well as, a financial counselor if needed.

Remember, Money Management International is here for you:

Thomas Nitzsche: The best thing you can do is educate yourself, get the information. Even if you're not ready to actually talk to somebody yet, you can go online and get it at moneymanagement.org.

Adam Walker: Do you want help getting out of debt? We’re here to help! Visit our website at: moneymanagement.org and find us on social media. On our website, you can talk to a credit counselor 100% online… without even having to pick up the phone. Our counselors will help you create a budget, provide advice, and find debt repayment options or referrals to other vetted organizations that can help you achieve your goals.

To learn more about how MMI helps people from all walks of life get unstuck and out of the vicious cycle of debt through personalized solutions that inspire hope, visit moneymanagement.org. This episode was produced by Edgewise Media. Script writing and production by Clara Jennings. Editing by Brandon Ellis and show hosting by me, Adam Walker.

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