What Is A Debt Management Plan?

Debt management plans are one of the most widely used options for consumers, what exactly are they?

Let's say you are floundering in debt, and it's beginning to spiral downwards out of control. You worry about what tomorrow might bring, and you don't want to answer your phone anymore. You're desperate for someone to throw you a lifeline... What are your options? You're probably familiar with the concept of bankruptcy, but are curious about other ways to resolve your debt.

Let's explore the option of a debt management plan: what is it, what can it do, and, just as importantly, what can't it do? A debt management plan, as a way for you to systematically rid yourself of debt, gets cobbled together for you with a credit-counseling service. A debt management plan (or DMP) does not remove your debt from the picture. So how is a DMP a positive thing?

Instead of you paying each creditor individually (and struggling to do so), a credit-counseling service negotiates with your creditors to agree on a way to be repaid. Credit-counseling services can also sometimes negotiate a lower interest rate than what you are currently paying on any given debt, or negotiate to remove late fees.

You pay one monthly payment to the credit-counseling service for all unsecured debt, rather than a payment to each individual creditor. (Unsecured debt includes credit cards, store accounts, medical bills and student loans. Secured debt, such as a mortgage or car payment, would not be included in the plan. Alimony and child support payments would also be ineligible with a debt management plan.) And, since the credit-counseling service is making regular payments to creditors, collection calls should stop.

Mind you, these services do not come free. Even non-profit services charge monthly fees for their help, and sometimes credit-counseling services charge fees upfront. Also be forewarned that even a self-described non-profit service may not be legitimate; check with your local Better Business Bureau, consumer protection agency, or state Attorney General's office about any complaints received about any particular service before you make a commitment. For every helpful and above-board credit counselor, there are unscrupulous providers. Those to watch out for include a service which pushes a debt management plan but doesn't work with you to build financial literacy to avoid similar problems later; a service which charges for any information you receive from them, and even a service which establishes a plan with you and then is late making payments (leaving you responsible for late fees and penalties) or, worse, doesn't make payments at all.

You are paying for a service's help as you move down the pathway to financial solvency. So, it's wise to know exactly what you are paying for, and how much you are paying, before you sign any agreement with a service. Most debt management plans run from 3 to 5 years. Be forewarned that many individuals are not able to exercise the fiscal discipline needed for an agreement stretching this length of time to benefit them, and they end up dropping out of their debt management plan and back into a financial quagmire.

Other downsides can include the fact that some creditors refuse to agree to a proposed DMP. Another is that when you sign up for a debt management plan, you agree to make consistent, monthly payments for the life of the agreement. This means that you cannot make smaller monthly payments than what you originally agreed to, no matter what the financial emergency. You also need to be aware that you cannot take on any new debt for the length of the program, which includes any new charges on credit card accounts. Your credit rating, as shaky as it may be right now, will take at least two years of steady payments before it will begin to improve. With the DMP route, your credit rating may be affected for up to seven years, though this may not be much of an issue if you already are experiencing financial distress. By way of comparison, the impact of bankruptcy can stay on your credit report from 7 to 10 years.

The benefits of a debt management plan can help your financial picture, but only if you have done your research, and only if you can consistently pay off your debt.