What Is A Debt Management Plan?

A Debt Management Plan (DMP) is a repayment plan that allows you to pay your outstanding debts in smaller monthly payments. The duration usually lasts three or four years, and you typically receive reduced interest rates and fee waivers. It can actually improve your credit score if you follow the plan as specified.

There are just a few simple requirements. You typically must be over 60 days behind in your payments, have a source of income, have two or more accounts, and owe more than $2,500 in unsecured debt. That’s it.

Video: An Introduction to Debt Management Plans

How Does A DMP Work?

You need to understand how the program works, so that you’ll know what to expect should you choose to enroll in the program. You can do this yourself, hire a non-profit organization to assist you, or hire a for-profit organization. If you choose to use a company to arbitrate for you, the following steps will provide a framework for you to navigate through the process:

Select a reputable company. The Federal Trade Commission (FTC) strongly recommends that you thoroughly investigate any credit counseling company you consider using prior to signing any agreement with them. The FTC has prosecuted many organizations recently due to deceptive practices and fraud.
Profit or Non-Profit Organization – You’ll need to decide which company to use. Reputable credit counseling companies have certified counselors trained in money and debt management, budgeting and consumer credit. Non-profit organizations are legally obligated to provide consumer education and counseling.
Questions to Ask – There are some questions you’ll want to ask before selecting a company. Find out how long the company has been in business. You want the one you choose to be around for the duration of your repayment plan. Make sure to ask what their fees are, including set up and monthly fees. Get rates in writing before signing anything. Find out if they will require a signed, formal agreement. If not, move on to another company.
Representation – The company you hire will represent you to negotiate with your creditors to arrive at a single affordable monthly payment for you to repay your debt. All information you provide this company is supposed to be kept confidential.
Cancel Credit – You have to know going in that you will probably be required to cancel all your credit cards prior to establishing a DMP. In addition, many companies prohibit you from applying for new credit throughout the duration of the program.
Repayment Plan Agreement – Once an agreed upon monthly payment is established, you will want to make sure this is concluded through a signed agreement with your DMP company. Payments will either be taken out automatically through your checking account, or you will send payment directly to your DMP organization. Your DMP company then pays your creditors. Keep in mind, you may still receive collection calls, although, they typically cease after you begin making payments, and creditors can still take legal action against you.
Commencement – Once the signed agreement is in place, contact all your creditors to verify their acceptance of the proposed plan prior to paying on your repayment agreement. After you are able to verify their acceptance, make sure you pay your payments on time every month. Always check your monthly statements to ensure your creditors are getting paid as promised. Contact the company you hired to manage your DMP if you will be behind on a payment or find that creditors are not being paid.
Fall Behind on Payments – If you become unable to make timely payments, your accounts will probably revert to the condition they were in prior to negotiating the DMP, since you will be breaking your agreement with your creditors. You’ll lose the lower interest rates, begin to receive late marks and rack up late fees. If you act quickly, you may be able to negotiate directly with your creditors to get your DMP back on track.
Out of Business – Unfortunately, it could happen. The DMP company you hired could go out of business. So, what do you do? You’ll need to immediately stop all DMP payments, begin paying payments directly to your creditors, notify your creditors of the situation and ask them if they will allow you the same advantages without the DMP. You may be able to work directly with your creditors to resolve the matter.

Video: How to Settle Credit Card Debt

A debt management plan is not for everyone. If you choose this route, though, follow it through to the end. You’ll end up repairing your credit and setting yourself up for success over the long haul.