Debt Management Plan

Debt management plan summary:

• Credit counseling agencies can set up debt management plans.

• A debt management plan is a structured repayment plan. 

• The payments on a debt management plan are often high. 

• Creditors are sometimes willing to waive fees or lower interest rates as part of a debt management plan.

Debt Management Plan Definition and Meaning

A debt management plan (DMP) is a three-to-five-year repayment agreement between a debtor, creditors, and a credit counseling agency. The debtor agrees to a fixed payment amount and sends it to the credit counselor every month. The credit counselor distributes the payment among the creditors. Payments continue until the debt is repaid in full.

Key Aspects of Debt Management Plans

If you have a large amount of debt, a credit counseling agency could help with advice on budgeting and managing your spending if you sign up for its program. DMPs are a debt relief service that credit counseling agencies offer.

DMPs are only an option for certain types of debt. You can normally get a DMP to pay off unsecured debt, such as credit cards and personal loans. Secured loans, such as mortgages and auto loans, aren’t eligible for a debt management plan.

Here’s how DMPs work:

• The credit counseling agency reviews your budget, income, and debts to calculate a monthly payment amount. 

• The payment will be enough to fully repay your unsecured debts within three to five years. If you’ve been making minimum payments on your credit cards, your DMP payment could be surprisingly high.

• You make one monthly debt payment to your credit counselor for the duration of the plan.

• You usually need to close your credit cards and agree not to use credit cards while you’re enrolled in a DMP.

• Your creditors may lower your interest rate or waive some fees to make it easier to repay the debts.

• When you stick to the payment plan, you get your debt fully paid off within three to five years.

Debt Management Plan Benefits

A DMP gives you a streamlined, structured way to consolidate your debt and pay it off. You no longer need to keep track of all your debts or make payments to several creditors every month. Your only responsibility is a single monthly payment to your credit counselor.

The credit counseling agency may be able to get better terms from your creditors, although this isn’t guaranteed. For example, if creditors agree to reduce your interest rates, then you could save money as you pay off your debt.

Creditors may also be willing to re-age your accounts, meaning they add past-due amounts to your balance and mark your accounts as current instead of past-due.

Debt Management Plan Drawbacks

DMPs work for a small portion of debtors, primarily those who have enough money to afford the monthly payments. If you can’t afford a DMP, there are alternatives that could better fit your financial situation, such as debt consolidation loans or debt settlement.

A DMP doesn’t reduce what you owe. You owe the same amount, as well as set-up and monthly fees for the DMP. When you have a DMP, you need to pay off all your debt within three to five years, so this type of plan often has an expensive monthly payment.

The Federal Trade Commission (FTC) reports that the average completion rate for DMPs is 21%. Specifically, the National Consumer Law Center says that “only consumers with considerable disposable income left over each month are able to get out of debt through a DMP.”