Definition
A debt management plan (DMP) is a debt repayment schedule that follows creditor guidelines and is tailored to a debtor’s own unique situation in order to help them avoid default, repay their debt and restore their credit rating.
Analysis
A DMP may be developed by a credit counselor as a possible solution for a debtor facing substantial financial difficulty. Most DMP candidates have some of the following characteristics:
- multiple unsecured debts
- living paycheck-to-paycheck
- lack substantial savings for emergency fund
- high credit utilization rate
- danger of late payments
A debtor who qualifies for benefits may enroll in a debt management program through a credit counseling organization. The agency will administer their debt management plan and apply for benefits on their behalf.
Benefits can include lower interest rates, a lower consolidated payment, waiver of certain fees and an automatic monthly payment. These benefits are negotiated by the organization and are used to provide a good faith estimate of repayment totals when the DMP is created. Details of the DMP, including the benefits requested, debt totals, repayment schedule and personal budget are included on a proposal that is submitted to each creditor included in the plan.
Most DMPs are structured to repay debt within a 3 to 5 year period. A consumer whose financial situation improves early is encouraged to accelerate payments so that they repay debt sooner and save on interest. A consumer that drops out of a DMP normally loses the benefits that were granted through the debt management program.
A DMP is designed for and is highly effective in the repayment of unsecured debt accounts. Credit cards and other revolving accounts can often be repaid at improved terms on a DMP. Secured debts are not eligible for a DMP, and should be left off. Accounts assigned to a collection agency may be included in a DMP, but they do not normally receive the quality of benefits often provided by original creditors.
