Debt Management Plans

How they can help: If your financial problems stem from too much debt or your inability to repay your debts, a credit counseling agency may recommend that you enroll in a debt management plan (DMP). Generally, they will only help with credit card debt and will not directly help secured debts.

  • A DMP alone is not credit counseling, and DMPs are not for everyone.
  • Sign up for one of these plans only after a certified credit counselor has spent time thoroughly reviewing your financial situation, and has offered your customized advice on managing your money.

How a DMP works:

  • In a DMP, you deposit money each month with the credit counseling organization, which uses your deposits to pay your unsecured debts, like your credit card bills, student loans, and medical bills, according to a payment schedule the counselor develops with you and your creditors.
  • You are only going to benefit from a DMP if you have enough money to pay the agency each month.
  • Continue to pay your bills until the plan has been approved by your creditors. If you stop making payments before your creditors have accepted you into a plan, you’ll face late fees, penalties, and negative entries on your credit report.
  • Contact your creditors and confirm that they have accepted the proposed plan before you send any payments to the credit counseling organization for your DMP.
  • Make sure the organization’s payment schedule allows your debts to be paid before they are due each month. Paying on time will help you avoid late fees and penalties. Call each of your creditors on the first of every month to make sure the agency has paid them on time.
  • Review monthly statements from your creditors to make sure they have received your payments.
  • Creditors may agree to lower your interest rates or waive certain fees, but check with all your creditors to be sure that they offer the concessions that a credit counseling organization describes to you and that these concessions are reflected on your statements.
  • A successful DMP requires you to make regular, timely payments, and could take 48 months or more to complete. Ask the credit counselor to estimate how long it will take for you to complete the plan.
  • Often you have to agree not to apply for or use any additional credit while you’re participating in the plan.
  • Questions to help you figure out whether a DMP is right for you:
  • Are you having trouble mainly with secured debt (that is, debts where your debt is secured by some kind of property such as a car or house)? If yes, then a DMP isn’t likely to help you. Exception, if you are only slightly behind on your secured debts and cutting your unsecured debts might free up enough extra money to help you pay your secured debts. The DMP will NOT directly help you with your secured debt problems.
  • Do you have little or no money left over in your budget each month? If yes, then a DMP isn’t right for you.
  • Are you still current on your credit cards? If yes, then a DMP is probably not a good idea. You might be able to improve your situation by taking budget counseling class and sticking to a tight budget, or by asking your creditors to reduce the interest rate on your cards.
  • Are you able to pay your priority debts and still have some money left over each month? If yes, then a DMP may be helpful. However, be sure to factor in any fees you will have to pay to the agency.
  • Can you make a long term commitment to making monthly payments? If no, then a DMP will not help you. The drop-out rates for these plans are very high and it’s a particularly bad idea to start out if you thinkthat you probably won’t be able to complete the plan.
  • Do you want to keep using all your credit cards while on a DMP? If yes, then a DMP is not for you. Most agencies will require you to stop using any remaining credit cards. Some will allow you to keep one card for emergencies.

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