Credit Card Companies Extend Relief to Debtors in Debt Management Plans

Nearly all of the major U.S. credit card issuers have agreed to modify debt repayment terms for consumers enrolled in debt management plans, the National Foundation for Credit Counseling (NFCC) announced yesterday. If you’re struggling to repay credit card debt and are already enrolled in a debt management plan (or have ever considered one), here’s what the changes mean for you.

American Express, Bank of America, Capital One, Chase, Citi, Discover, GE Money, HSBC, U.S. Bank and Wells Fargo all agreed to a request the NFCC made in October 2008 to make changes to credit card debt repayment terms for consumers in debt management plans.

The changes reduce the minimum monthly payment amounts the creditors will accept from consumers and allow debt management plan participants to allocate a portion of their monthly budget to saving. (Previously, plan participants had to agree to allocate all available funds (after monthly living expenses) to repaying debt.

Debt management plans currently ask most participants to make minimum monthly payments equal to up to three percent of their credit card balances. The changes to this requirement include:

  • Debtors facing “hardship” including recent job loss will owe a minimum monthly payment of 1.75 percent of their total debt.
  • Other participants would owe a minimum monthly payment of two percent of their total debt.
  • Plans will no longer require consumers to earmark all additional money to debt repayment every month; they will encourage participants to save some cash as well.

Although we all know the best way out of debt is to pay far more than the minimum required payments, these changes can help consumers who have less cash available due to job loss or other economic conditions avoid default or bankruptcy. I also like that the changes will encourage some level of savings. In a recession, some saving takes priority over debt repayment.

Debt management plans have pros and cons. They’re not for debtors who are already succeeding managing their own debt repayment. In other words, consumer already making timely minimum payments to creditors and those motivated to increase payments as soon as practical. Debt management plans can help those who are falling behind or who have found it impossible to escape the minimum payment trap on their own.

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About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.