When is a Debt Management Plan a Sound Move?

Dear Opening Credits,

I want to know if entering into a debt management plan is a wise choice for me. I am a single parent who never received support. My credit cards total $22,474. The rates on the cards are 9.9% and 0%. I've never paid late. I am currently leasing a car because of high ratio owed. My salary is $63,000, but I also have student loans for a master's degree starting in November 2012.

- Betty

Dear Betty,

Maybe. Debt management plans can be beneficial arrangements for people who need help paying down their balances. As you may already be aware, these plans are offered by credit counseling agencies. To know if it's a good decision or even an option, you have to first go through an hour-long appointment with the credit counselor. Being an alumni of one such agency, however, I can walk you through the process.

The session consists of a thorough review of your income, expenses, assets and liabilities, as well as your goals. The counselor will analyze it all and then present an action plan that consists of a series of suggestions based on your desires and circumstances.

If you have enough money to pay your bills by selling unnecessary assets or by prioritizing your budget, the counselor will explain how you can do so. On the other hand, if you can't make it on your own, but have just enough money left over after paying your basic expenses to meet all of your creditors' minimum payments, a debt management plan will be suggested.

Many credit card companies reduce interest rates for those on a debt management plan, and because of that more of your payment goes toward the principal. Plans are arranged for total debt elimination between three and five years, which gives you the assurance that you'll be in the clear after that time. This can be a great relief to those who feel they'll never pay the debts down because the finance charges are so high.

So would it be right for you? That's hard to say without knowing what you need to spend on essentials. I do know that your interest rates are already excellent (you can't get better than zero, right?), so you're unlikely to get a better deal with a debt management plan. Still, if the boundaries set by the agency are attractive -- you must close the cards on the plan and promise not get into any more debt while you're working with the agency -- it may be fine.

There are downsides, of course. While the plan itself has no negative effect on a FICO score, lenders who view the report itself and see that that you're participating on a third-party payment plan may assess the notation poorly.

Given all that, if you can pay the debt independently, you ought to do so.

To mimic a debt management plan, figure out how much you'll need to pay the debt down in the same time frame as what an agency would arrange. For example, for a three-year plan, you'd need to send about $675 each month. I averaged your interest rate to 5% for the total debt, so you can be more precise by plugging your actual numbers into a debt payoff calculator. Can't manage that sum? Go for the longer repayment time frame of five years, which will only cost you $425 per month. Whatever you decide, stick with it and don't charge another penny while in debt payment mode.

In the meantime, you have a student loan looming. Start to pare your spending down now so you can adjust for its payment. If you have any property or assets to sell, do so and apply the proceeds to the consumer debt. The sooner that's out of the way, the more you can concentrate on repaying what you borrow for your education.

You don't specify why you aren't receiving child support, but you may want to pursue what's owed to you. The effort and time in doing that may be extreme, but if it's safe and possible, consider it.