Debt Management Plans

A debt management plan (DMP) is a common solution for individuals who are carrying too much unsecured credit card debt and are having difficulty paying bills to a number of different creditors each month. A reputable credit counseling agency can structure a DMP for you in which you make one streamlined payment each month to the counseling agency, who in turn allocates funds to your various creditors. All accounts included in a DMP become inactive, and the closing of these accounts will temporarily negatively impact your credit score. However, a DMP will result in a lower blended monthly interest rate and monthly payment while giving you the opportunity to demonstrate a consistent payment history, rebuild your credit profile and get out of debt over a three- to five-year time period.

A debt management plan may be a good idea for individuals who want structured repayment support and have the ability to make consistent monthly payments. It’s important to compare options and speak with a professional to review your financial situation and confirm eligibility before enrolling. 

Some debt management services involve fees. Fee structures vary by provider, and all costs should be clearly disclosed and reviewed carefully before enrollment. Whether for personal debt relief or business debt relief, be sure to prioritize debt management companies that are licensed with transparent pricing. 

You might choose to start a debt management plan if you have multiple debts that you’re struggling to pay on time each month, you’re not lowering your total balances and you’re unclear on how to become debt-free. Taking action as soon as possible can help prevent worsening debt challenges. 

It is not common for an individual to have more than one debt management plan. In a DMP, the debtor works with a credit counseling agency who has existing relationships with credit card companies and works to negotiate lower interest rates and monthly payments over the life of the plan. Participants are encouraged to include as many accounts that can be brought into the DMP, depending on the individual circumstances associated with each account, the debtor, and the counseling agency relationships. When a debt management plan is comprehensively constructed, there simply isn’t a need for a second DMP.

For those individuals with existing mortgages, enrolling in a debt management plan should have little to no consequence. A mortgage payment remains a top priority, and keeping current on payments toward a debt management plan should be considered on equal footing. Both become equally important. For those individuals enrolled in a debt management plan who are pursuing a mortgage or looking to refinance, it can prove difficult to get more attractive interest rates and terms, because the presence of the DMP indicates some degree of credit risk that potential lenders will seek to be compensated for in the form of higher interest expense.

Enrolling in a debt management plan generally will not have a negative impact on a credit score. All accounts entered into the plan must be closed, but even these closed accounts can remain on a credit report for up to ten years, resulting in less of an impact in reducing the average age of accounts and lowering a credit score. Closing accounts can lower the total available credit (but not by much if the accounts being closed were already close to “maxed out”) and therefore raise the credit utilization ratio, and this can have a negative effect on a credit score. However, when timely monthly payments are made against the DMP, positive credit history builds, and there generally will be minimal to no negative impact on a credit score as a result of the debt management plan.

Debt Management plans typically are designed for three to five year time periods, and this breaks out into anywhere from 36 to 60 months total duration. The DMP is designed to facilitate the complete payment of all unsecured debts included within the program over the designated time frame.

A debt management plan is a structured agreement entered into among multiple parties – the debtor, creditor, and credit counseling service. A properly structured DMP that is overseen by a skilled credit counselor helps debtors get out of debt while assisting creditors in collecting money that is owed to them. It is the responsibility of the debtor to make one timely monthly payment to the counseling agency, who then disburses specified amounts to the individual creditors participating within the plan. Creditors make interest rate concessions through debt management plans that are arranged by counseling agencies because doing so allows creditors to collect on accounts that could otherwise become worthless. Debt Consolidation involves consolidating multiple debts into one single loan, typically resulting in a lower blended monthly interest rate, a lower monthly payment, and lower interest expense over the life of the loan. Debt consolidation does not involve a third-party credit counseling service, and the responsibility is on the debtor to use the proceeds of the debt consolidation loan to pay off the pre-existing unsecured debts, leaving the debt consolidation loan and one monthly payment to pay off in a streamlined, simplified manner.

Debt management plans can be worth considering for those seeking organization and payment stability rather than debt reduction. Whether or not it’s the best option will depend on personal circumstances and financial goals.