What is a Debt Management Plan (DMP)?
If you are unable to pay off your debts and have already applied the advice of a credit counseling agency, you might consider enrolling in a debt management plan (DMP).
This article covers the basics of debt management programs, including information to help you decide whether it is the right course of action for you. For more articles relating to debt relief and bankruptcy alternatives, see FindLaw's Debt Negotiation and Settlement section.
What Is a Debt Management Plan?
A DMP is a plan that allows you to deposit a set amount of money with a credit counseling organization each month, which is then strategically dispersed to your various creditors.
Consumers typically enroll in DMPs only after receiving a recommendation from a certified credit counselor who has thoroughly reviewed their personal finances. It is a temporary solution for certain cases, but is no replacement to creating a budget and managing your finances.
How Debt Management Plans Work
Figuring out which debts to pay first, how much to pay each month, and other logistical decisions can be a frustrating endeavor. DMPs are designed to help consumers work off their debt as quickly as possible by leaving these decisions largely to credit counseling professionals.
Basically, you (the debtor) will deposit money with the organization managing the DMP on a monthly basis, which will be used to pay unsecured debts, such as student loans, auto loans, and credit card balances.
Creditors may agree to waive fees or lower interest rates, since the use of a DMP may give them more confidence that you won't default on your loan, but it really depends.
See also Becoming Debt-Free: Your Options.
What Are the Pros and Cons of a Debt Management Plan?
A DMP has several benefits, including:
- You will stop getting harassing collection calls.
- You will have a fixed timeline (3-5 years) to pay off your debts.
- You will only have to pay one monthly fee.
- You will get free education and financial counseling to help you better manage your financial situation.
There are also some drawbacks to enrolling in a DMP. So, make sure to take the following into consideration:
- You will have to close your credit card accounts as you work your way through the plan.
- Only unsecured debts like credit card debts and medical bills will be included in your repayment plan.
- You may need to pay a one-time setup fee to enroll in the plan.
- Some lenders may not accept the DMP.
How Long Does a Debt Management Plan Last?
DMPs usually take several years—perhaps four or five—to complete (ask your credit counseling organization for an estimate).
Do Debt Management Plans Hurt Your Credit?
If the agency keeps making on-time payments, your credit score won't likely be affected long term. Your credit may be impacted at first when you close your credit cards but it should improve when the agency starts making debt payments on your behalf.
DMPs: Questions for Your Credit Counselor
Ask your credit counselor the following questions to help you make more informed decisions before signing onto a DMP:
What other services can you offer me besides a debt management plan? Will you also provide me with ongoing debt and money management advice?
- Organizations that only offer DMPs should be avoided. Since the larger goal is greater financial empowerment, DMPs alone are not a viable solution. Find one that also can help you develop a budget and manage your money.
How will I know that my creditors will be paid on time and in the right billing cycle?
- If you choose a DMP, check to make sure your creditors will be paid before the due dates and in the proper billing cycle. This comes down to trust, but reputable credit counseling organizations will guarantee it in writing.
How do you determine the amount of my monthly payment? Can I afford it?
- They should know what you are able to pay, but don't sign up for a DMP if you can't afford the payment plan.
How can I track the progress of my DMP? Can I access my accounts online?
- Look for an organization that offers regular account statements, preferably online.
Are you able to negotiate with my creditors to lower my interest rates or waive certain fees?
- If so, double-check with your creditors and ask how long you will have to be on the DMP before rates are lowered or fees are waived.
Are there any debts that will not be included in the plan?
- If so, you will have to pay these debts on your own.
Will my creditors require debt repayments before they accept the plan?
- Some may have such a requirement but check with your creditors to verify before sending payments to the credit counseling organization.
Will my credit rating be affected by enrolling in a DMP?
- If an organization claims it can get rid of negative information from your credit report, steer clear. It is not legally possible to do so, as long as the information is accurate. Regardless of your enrollment in a DMP, negative information stays on your report for as long as seven years.
Getting the Most Out of Your DMP
Just having a plan in place is only the beginning. The following advice will help you successfully complete your DMP and become financially solvent:
- Do not stop paying your bills directly to your creditors until your plan has been approved (if you do so, you may end up with late fees and hits to your credit rating).
- Before sending monthly payments to the organization handling your DMP, confirm with your creditors that they have in fact accepted the plan.
- In order to avoid late fees and penalties, make sure your DMP payment schedule is set up so that your debts are paid before their due date each month. It may be helpful to contact your creditors regularly to make sure they are being paid on time.
- Check monthly statements to make sure your creditors are receiving your payments.
- If lowered interest rates or waived fees are part of the plan, confirm this by reviewing your statements.
Are There Other Debt Relief Options?
If you don't think a DMP is the best solution for you, there may be other options you can consider. These could be:
- Debt consolidation loan: This is when you get one loan to cover all your debts. It allows you to make monthly payments at lower interest rates.
- Bankruptcy: If you satisfy the requirements, filing for bankruptcy may also be an option for you. Bankruptcy will discharge most debts but will stay on your credit report for 7-10 years depending on the type of bankruptcy you file.
- Debt settlement: This is when you can get your lender to settle for less money than the amount you actually owe.
Talk with a bankruptcy attorney to understand your options and which next steps to take.