Debt Management Plans

One of the options offered through most credit counseling agencies is a debt management plan, often referred to as a DMP. This plan deals with unsecured debt (credit cards, medical bills, and unsecured loans). The consumer makes monthly payments to the agency. The payment is then divided up and sent to the consumer's unsecured creditors. With very few exceptions, the creditors give all agencies the same 'deal.' The deal is that most credit card companies agree to not charge late fees going forward as long as you stay current with your DMP, and many creditors reduce interest rates. Additionally, most creditors in a DMP agree to 're-age' your account which means that the minimum payment due will go back to the amount it was before you got behind, or lower. The creditors then returns a portion of the money paid by the consumer back to the agency as payment for this service. This is called a 'fair share' payment. The debt management plan typically lasts about five years.

Pros

  • Some of the creditors reduce interest rates and stop late fees.
  • Some creditors will re-age accounts, which means the minimum payment amount will go back to what it was when the account was current, or even lower.
  • Further use of credit is prohibited or strongly discouraged in this plan.

Cons

  • DMP plans are for unsecured debt (debts in which you did not put up any of your personal property as collateral to secure the loan) and cannot help with car or house payments, tax debts, garnishments or pending lawsuits.
  • Some credit counseling agencies don't always make payments to your creditors on time, incurring late fees and interest rate increases for you.
  • The DMP was designed for people who have enough income to pay all their living expenses and the DMP payment, without using further credit. A DMP will not work for consumers who cannot balance their budget and have enough money to pay for a plan.
  • While exact figures are not available, according to the National Consumer Law Center the drop out rates for a DMP are very high.
  • Some agencies are aggressive and even deceptive.
  • While in a DMP, creditors may note on credit reports that the debt is not being paid as originally agreed or that the consumer is on a DMP.

What to Avoid

  • Avoid counseling agencies that sign everyone up to a DMP.
  • Avoid high fees by calling several agencies and comparing.
  • If the agency charges more than a $50 set-up fee and a $25 monthly fee, look for a better deal.
  • Avoid agencies that have associations or close ties to a for-profit company such as a loan company.
  • Avoid agencies that only deal with some unsecured creditors and not others.
  • Avoid agencies that are not looking at your full financial picture.
  • Avoid anyone who aggressively pushes debt plans or the possibility of a consolidation loan in the future.
  • Avoid any agency that gives commissions or a bonus to their employees for signing consumers to debt management plans.

What to Look for

  • Look for an agency that offers a variety of services and educational opportunities.
  • Look for reasonable fees.
  • Open your credit card statements every month and check that payments have been made by the credit counseling agency as agreed.
  • All statements should be directed to your attention and not to the agency.
  • Double check that you are not being charged late fees or increased interest rates.
  • Call their customer service department immediately if any problems occur.
  • Make your payments at the same time every month as agreed with the agency.

Potential Impact on Your Credit

During a DMP (Debt Management Plan), creditors may report to the Credit Reporting Agencies that their debt is not being paid as originally agreed or that the consumer is taking part in a DMP.