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Debt Management and Debt Management Plans – A Guide

Michele Lucato 17th Aug 2023 No Comments

Reading Time: 3 minutes

What is a Debt Management Plan (DMP)? A Debt Management Plan is a structured strategy provided by nonprofit credit counseling agencies to aid individuals who find it challenging to pay their credit card bills every month. The idea behind a DMP is to amalgamate various credit card payments into a single payment. This could reduce interest rates significantly, sometimes even cutting them in half, and provides a structured timeline to settle the debt, typically within three to five years.

How Does a DMP Work?
Advantages of DMPs
Limitations of DMPs

How Does a DMP Work?

Counseling Session: Initially, a credit counselor reviews an individual’s financial condition. They might propose various solutions, of which a DMP is one of them.
Coverage: DMPs typically handle unsecured debts like credit cards and personal loans. Secured debts, such as mortgages and auto loans, and student loans, are not included.
Agency’s Role: The counseling agency contacts each creditor to notify them about the DMP and makes arrangements for payment. The counselor may negotiate with the creditors for concessions like reduced interest rates, lower monthly payments, and waiving off late fees.
Payments: Every month, the individual makes a payment to the counseling agency. The agency then distributes these funds to the creditors. Monthly progress reports are provided.
Fees: Generally, an enrollment fee and a monthly fee for each credit account in the plan are charged. However, despite these fees, the overall monthly payment is often lesser than what the individual was previously paying.

Here is a good overall guide on what is a debt management plan – it should provide you with plenty of insight.

Advantages of DMPs

Consolidation of payments into a single, possibly lower, monthly payment.
Potential to negotiate lower interest rates and fees.
Predictability of knowing when debts will be paid off.
Lesser impact on credit scores compared to options like bankruptcy or debt settlement.
Halting of phone calls and letters from collection agencies while on the plan.

Limitations of DMPs

They might not address root problems, such as habitual overspending.
Generally, DMPs handle only unsecured debt.
Closing credit card accounts as part of the plan may reduce access to credit and could negatively impact credit scores.
Creditors might add a note to credit reports about the DMP, which while neutral, might signal to future lenders about past financial struggles.
Not all creditors may agree to the terms of the negotiated plan .

When is a DMP Most Effective? DMPs are best suited for those grappling with revolving debt. They offer the opportunity to put debt in the past. On the contrary, they might not be the best option if an individual:

Struggles with secured debts.
Has an income that barely covers essential expenses.
Wishes to continue using their credit cards.

Selecting the Right Debt Management Plan: It’s crucial to ensure that the DMP is provided by a reputable agency. Those interested should seek nonprofit agencies accredited by organizations like the National Foundation for Credit Counseling. Before agreeing to a DMP, individuals should discuss their financial conditions with a credit counselor, aiming for a plan tailored to their needs. For those considering a DMP, consulting with a certified credit counselor is a wise decision.

Conclusion: A Debt Management Plan can be a lifeline for those drowning in unsecured debts. By providing a structured plan and potential interest savings, it offers a clear path out of debt. However, like any financial decision, it’s essential to consider its advantages and limitations and consult with professionals before diving in.

Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.