How to Become Debt Free With a Debt Management Plan in Minnesota
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For people in the right financial situation, a Minnesota debt management plan can be a great way to become debt-free. If this is a solution you want to pursue, we will let you know how to find a reputable credit counseling agency, what to expect, discuss what factors go into your decision and how to set up and maintain your Minnesota DMP payments.
Written by Attorney Eva Bacevice.
Updated January 13, 2020
If you are having trouble paying your bills or keeping up with debt in Minnesota there are several options available that could help get you back on your feet financially. One of these options is a debt management plan. A Minnesota debt management plan (“DMP”) is a form of debt consolidation that you can set up through a credit counseling agency. Working with a certified credit counselor you can set up a budget and payment plan where you make one monthly payment and they take care of making payments to your creditors. This can be helpful in several ways. First, your credit counseling agency can negotiate with your creditors to get lower interest rates and relax late fees. Second, the plan will be set up to pay off all of your debts in full, usually running between two and five years. Third, a Minnesota debt management plan is not dependant on your credit score, so it is available to people who might not qualify for other solutions. Additionally, you will only have to make one payment a month rather than keep track of a lot of different bills. Finally, even though your credit score may take a negative hit initially, as the balances on your debts go down your credit score will go up. There are still downsides to consider as you decide on your best debt-relief plan. A Minnesota DMP can be a great solution if you are struggling primarily with credit card debts that typically come with high-interest rates, although you will need to close those accounts. It may be possible as well to include some medical bills if your credit counseling organization has a relationship with the medical provider similar to their relationships with credit card companies, but it will not help with payday loans or secured loans like a car loan. While only needing to keep track of one payment sounds great in theory, keep in mind that it is going to be a large payment, so you will need to commit to the budget you set up to be able to afford the monthly payment. The biggest risk, however, is if you are unable to maintain your payments, because if the Minnesota debt management plan fails your overall debt will get worse as default interest, penalties and late fees kick back in.
Is a DMP the Same as a Debt Consolidation?
While a Minnesota debt management plan is a form of debt consolidation it is not the typical form of that debt relief. A traditional debt consolidation usually involves taking on new debt to pay off your existing debt and then, similar to a DMP, moving forward you will only need to make one monthly payment. With a debt consolidation, you can usually keep your current credit card accounts open, and there is nothing to stop you from taking on other new debts. For debt consolidation to truly be cost-saving you need to have good or excellent credit to qualify for a lower interest debt consolidation loan, which limits the people who can pursue this debt repayment plan. A debt consolidation loan can be done in different ways, whether through a personal loan, credit card balance transfer, mortgage refinance or home equity line of credit. The last two options are problematic because they create a significant risk. If you are paying off debt like credit cards and medical bills by refinancing your mortgage or taking out a line of credit you are essentially converting unsecured debt into secured debt. This means that if you default on the loan you are risking losing your home.
How to Become Debt Free with a DMP in Minnesota
For people in the right financial situation, a Minnesota debt management plan can be a great way to become debt-free. If this is a solution you want to pursue, we will let you know how to find a reputable credit counseling agency, what to expect, discuss what factors go into your decision and how to set up and maintain your Minnesota DMP payments.
Find a Credit Counseling Agency
One of the most important parts of this process is to make sure that you are working with a reputable credit counseling agency. While there are a lot of great options available there are, unfortunately, also a lot of scammers out there looking only to make a profit. The first thing you can do is limit your search to nonprofit organizations. This alone is not enough to ensure you are working with a good company but it is a good first step since you can easily check if a nonprofit credit counseling agency is certified by the National Foundation for Credit Counseling. The NFCC has rigorous standards for accreditation that help to provide the best possible service. You can also check with the Minnesota attorney general's office, which houses the state’s consumer protection division, to see if any complaints have been filed against the credit counseling agencies on your list. You can also check for complaints and ratings with the Better Business Bureau. As you are looking for a credit counselor you can check to see if they are certified or trained in the relevant areas of consumer credit, money and debt management and budgeting. Also, be on the lookout for red flags. The initial credit counseling session should always be free. If there is a cost involved you should move on. Reputable credit counseling agencies will provide free informational or educational materials before meeting for a credit counseling session. If you are asked to pay for these materials or disclose any personal information that is another red flag. You should also check that the Minnesota credit counseling agency offers a range of services and debt relief options, which can include debt management programs, financial counseling, and workshops.
What to Expect at Credit Counseling
You can and should expect your initial credit counseling session to be free. The session will generally last between 45 minutes and an hour. You will meet one-on-one, most typically over the phone, with your certified credit counselor. If you prefer to meet in person that may be an option but will likely take more time to find. To make your meeting as effective as possible you should bring along your recent paycheck stubs and bills. Make certain that your bills are showing the total amount you owe, your minimum payment and your current interest rate. During the meeting, your credit counselor will review your financial circumstances in depth. With your permission, they can show you how to obtain a free copy of your credit report. They will find out about your financial goals and come up with an action plan to get your personal finances back on track. This process is confidential and your creditors will not be involved during this appointment. At the end of the session, your credit counselor will recommend your next best steps, including whether you are a good candidate for a Minnesota DMP or another debt management program.
Making the Decision & Getting Started
If your credit counselor recommends a Minnesota DMP to reach your financial goals you can take the time you need to decide whether this debt relief plan will work for you. If you are being pressured to make a quick decision that is not a good sign. You can also request additional information to help you make your decision. It is a good idea to ask about the cost structure and find out about set-up fees and monthly fees to administering the Minnesota DMP. You can also ask about how your credit counselor is compensated. If they receive bonuses or incentives for signing people up that is another red flag. Perhaps the biggest piece you will need to decide is if the budget you created together is one you can reasonably live with. Chances are it will involve a large monthly payment and you want to be certain that you and your family are comfortable with it before you commit. Remember, if the DMP fails, you’ll likely end up with more debt than when you started, so you should explore other options as well to make an informed decision. You may decide to meet with a bankruptcy attorney to explore that route after your credit counseling session to see if that is an alternative option.
Put Together Your Minnesota Debt Management Plan
Once you have made your decision to move forward with a Minnesota debt management plan you will need to work with your credit counselor to put it together. You will need to provide additional information including your bank account(s) and detailed information about your credit cards. For your credit cards, it is important to provide your cardholder agreements that you likely received in the mail after opening the account. If you didn’t keep the paperwork or can’t find it you should be able to find it online. Keep in mind that this is a very important part of the process because you can fine-tune the details and confirm that you included all expenses in your budget. You also want to ensure that the due date works with your pay frequency and other expenses. This is also your time to confirm details, like the total DMP payment amount, the monthly fees and the start date. You can speak with your credit counselor about whether to maintain payments that come due before the plan is in effect and once you and your credit counselor are satisfied they will reach out to your creditors to negotiate on your behalf and get them on board with the DMP.
Begin Payments
It is important to begin your Minnesota DMP with good habits, specifically making your payments on time or even early. If you have any questions about the due date or payment amount check with your credit counselor right away. Keep in mind that it will be an adjustment to stick to your new budget and make certain that your monthly expenses are on track as well as your DMP monthly payment. Staying in touch with your credit counselor is also important so that you can know when your creditors have accepted the plan and get an idea for how long that part of the process will take, and be sure to let your credit counselor know if you want to be notified about each creditor or just be informed when the plan is in place. As part of the Minnesota DMP, your creditors will close your accounts and the DMP may be noted on your credit report but that should not have a negative impact on your credit. As you progress in your DMP and your debt balances go down, your credit score will go up.
How to Stay Current With Your Minnesota Debt Management Plan
There are some other practices you can put into place to help you succeed with your Minnesota debt management plan. You can set the monthly payment date to one that works with your pay frequency and is not a date when other large payments are due; most often it is best to avoid the first of the month for this reason. Make sure to stay in touch with your credit counselor and let them know right away if anything changes with your personal finances. See if it helps to track your spending while you are getting used to living within the budget. You should also come up with a system for setting aside funds for upcoming non-monthly expenses, like back to school clothes and supplies. Your budget should include money being set aside for an emergency fund in case you have unexpected expenses that come up. You can always make extra payments when you are able but don’t forget to replenish your emergency fund if you had to use it. Also, be in touch with your credit counselor about any emergency expenses because they are a resource to you and may have additional recommendations that can help.
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Minnesota Debt Consolidation
Even though a DMP is a form of debt consolidation your credit counselor might recommend that your best debt payment option is a traditional Minnesota debt consolidation. This is usually only an option if you have good or excellent credit to get a lower interest rate on your debt consolidation loan, and if you are dealing primarily (or only) with credit card debt. Debt consolidation allows you to keep your accounts open and active but does not offer a solution to avoid overspending going forward or taking on new credit, like learning to live within a reasonable budget in a DMP.
Minnesota Debt Settlement
As you are looking into different debt relief options you are likely to come across many for-profit companies pushing debt settlement. While a Minnesota debt settlement can be a great solution in the right circumstances, it can also be costly and ineffective. Debt settlement involves negotiating with creditors to pay a portion of your debt and forgive the rest. The barrier is that to get the creditor to agree, you need funds available to pay the lump sum upfront. Additionally, creditors do not have to agree, so if only some are willing to play ball, you may not be able to eliminate your total debt.
Minnesota Bankruptcy
Finally, it may be the case that bankruptcy offers your best debt solution. Bankruptcy is a legal remedy that allows you to walk away from your unsecured debts and get a fresh start. You can always look for a free consultation with a bankruptcy attorney after your credit counseling session to see if it is a better option. If you do move forward with bankruptcy you can check Upsolve’s screening tool to see if you qualify for free assistance throughout your Minnesota bankruptcy.
