Understanding Debt Management Plans: Can You Cancel and Should You?

A debt management plan (DMP) can be a lifeline for those struggling with credit card debt, offering lower interest rates and monthly payments while keeping debt collectors at bay. However, there may come a time when you need to reconsider your DMP. Whether your financial situation has improved or you’ve found a better way to manage your debt, it’s important to understand the implications of canceling your DMP. Here’s what you need to know.

Can You Cancel a Debt Management Plan?

A debt management plan is a voluntary agreement between you, your creditors, and a credit counseling agency. Typically lasting three to five years, a DMP can make your unsecured debt—usually credit card balances—more manageable and help you avoid the consequences of not being able to keep up with your obligations.

If you change your mind, you can cancel a DMP at any time. Some of the potential reasons you may consider canceling your DMP include:

• Your financial situation has improved, and you no longer need the DMP.
• You’ve received a windfall of cash and can pay off your debt in full.
• You no longer want to pay the plan’s monthly fee.
• The plan is simply not working for you.

Should You Cancel a DMP?

Depending on your situation, canceling a DMP can have both advantages and disadvantages. Understanding the pros and cons can help you determine whether it’s the right decision for you.

Pros of Canceling a DMP

• Avoid Monthly Fees: Monthly fees on DMPs can vary based on the agency you’re working with and your particular plan details. On average, it costs $35 per month, which adds up to $2,100 over five years.
• Pay Off Debt Faster: If your financial situation has improved, you may be able to pay off your debt more quickly, saving you some money on interest charges and fees.
• Regain Access to Credit: It’s possible to open new credit while you’re on a DMP, but it could jeopardize the terms of your plan. New lenders can see that you’re on one and may adjust your loan terms accordingly. If you cancel your DMP, you may have more opportunities to get credit without limitations.

Cons of Canceling a DMP

• Increased Costs: When you’re on a DMP, your credit counselor will typically negotiate lower interest rates and monthly payments, as well as fee waivers, with your creditors. If you cancel, your creditors will likely reinstate the original rates and fees.
• Direct Dealings with Creditors: On a DMP, you make just one monthly payment to the credit counseling agency, which distributes the money to your creditors on your behalf. Once you cancel, you’ll have to start making individual payments to each lender again.
• Collection Calls: If some of your debt is in collections, you may start getting calls from the collection agency again. If you can’t make your payments, you could be subject to a lawsuit.

Is There a Fee to Cancel a DMP?

While canceling your DMP will prevent you from having to pay future monthly fees, the credit counseling agency may charge a fee to cancel the contract. You may also not be able to get a refund of previous fees you’ve paid—some agencies may offer refunds if you cancel within the first month or so. Double-check your agreement or speak with your counselor to see what the terms are for your situation.

How to Cancel a Debt Management Plan

Before you proceed, make sure you read the terms of your DMP contract to understand all the potential consequences of cancellation. If you can’t afford to pay off all of your debt immediately, make sure you have alternate plans in place to keep making payments before you cancel your DMP to avoid further consequences. With that in mind, there are generally a few different ways you can cancel a DMP:

• Contact the Agency and Your Creditors: Depending on the agency you’re working with, you may be able to cancel your DMP over the phone or in writing via email, mail, or fax. You’ll also want to notify your creditors of your decision so you can discuss the path forward.
• Pay Off Your Debts: There’s generally no penalty for making extra payments on your DMP, and if you can afford to pay off all of your balances at once, that’ll end your agreement early.
• Stop Making Payments: In some cases, missing just one payment on a DMP will result in cancellation, while others may allow up to three missed payments. That said, communicating with your credit counselor and creditors instead can leave a better impression with your creditors and prevent damage to your credit score.

Monitor Your Credit as You Pay Off Debt

Whether or not you decide to cancel your debt management plan, it’s important to keep a close eye on your credit score to understand how your actions impact your overall credit health. With Experian’s credit monitoring service, you’ll get access to your FICO® Score and Experian credit report for free, as well as real-time alerts when changes are made to your credit report. As you work to pay down debt and improve your credit score, keeping track of your progress can help you ensure success.

At O1ne Mortgage, we understand that managing debt can be challenging. If you need assistance with your mortgage or have any questions about debt management, don’t hesitate to call us at 213-732-3074. Our team of experts is here to help you navigate your financial journey and find the best solutions for your needs.