Debt Management Plans in Detail

A debt management plan (DMP) is the increasingly preferred option for resolving tough financial issues. As an alternative to bankruptcy, it is a personal finance program to suit the unique circumstances of the individual debtor, since diverse financial situations affect the ways money should be managed. Fortunately, the average consumer has access to a variety of resources which help them navigate the process.

Managing finances correctly ranks among the top adult concerns. In fact, decisions involving money affects practically every aspect of life including lifestyle choices, transportation preferences, and financing a place to live. Mismanaged, any one of these areas can lead to uncontrolled debt. The realization that help is needed to manage debt is followed by finding the most favorable way to do so.

 Is a Debt Management Plan a Bankruptcy?

DMP’s and bankruptcies are not the same. A debt management plan consists of an arrangement between debtors and creditors to pay outstanding debt. The plan manager negotiates with each lender to pay a certain amount each month toward the balances. The borrower makes a payment to the plan; the manager disburses to the creditors as agreed.

A management plan addresses unsecured consumer credit only, which is debt without a lien on property to protect it from default. Credit cards, utility bills, and retail credit are some examples of unsecured credit.  Lenders have the option of refusing to participate in a debt management plan. 

Bankruptcy is a legal proceeding that is filed in court. In the United States, it is government regulated by laws under a set of bankruptcy codes written for specific areas surrounding bankruptcy. All debt management plans are run by the same basic rules. On the other hand, there are different types of bankruptcies, such as those that allow for liquidation of debt and bankruptcies that deal with secured debt. 

Similarities between a DMP and bankruptcy include:

• The end game is for the debtor to obtain improved financial standing.
• Payments are made to creditors by a third party.

• Missed monthly payments may result in dismissal.
• Eventually, credit can be reestablished upon completion.

Managing debt through a negotiated plan works out better than bankruptcy for some people. A bankruptcy can remain on the credit report for up to ten years. It also requires an appearance before a judge in court, and forfeiture of non-exempt assets such as investments. However, borrowers who cannot find adequate resolution with a debt management plan still have the option to file bankruptcy.

Who May Benefit from Debt Management?

Individuals that find themselves regularly behind in bills are potential debt management candidates. Not everyone who makes late payments has to pursue this course of action. However, missed or late payments send credit scores into a nose dive almost instantly. The resulting late fees and interest rates are quite costly. Seeing a pattern of this behavior should motivate the consumer to take some sort of action, even if it means working with creditors directly.

Persistent late payments may be the first indicator of debt overload and the need for financial intervention. Consumers that have exhausted savings in an unsuccessful attempt to bring bills current also find relief through an individualized debt management plan, which are appropriate for anyone:

• Using credit cards for daily necessities out of need rather than convenience

• Carrying balances on credit cards for years

• Requesting a credit line increase to pay bills

• Borrowing money to pay debt

• Failing to make or maintain payment arrangements with creditors

With assistance attacking mounting debt, some of these issues can be eliminated. Having one payment that the borrower can afford leaves some money in the budget to cover expenses and to put back into savings. There are specific steps that lead to this method of debt relief.

If you can relate to one or more of the scenarios mentioned above then a debt consolidation loan may be suitable for you, and in that case, we encourage you to explore your options by clicking the link below. 

This is How It Works

Management plans are only successful if lenders agree to negotiate some terms of the debt. Lower interest rates and late fee waivers are common in a debt management plan. Often, the repayment terms on loans or credit cards are lengthened in order to keep monthly payments low. The principal balance is not forgiven; that is usually part of a debt settlement situation.

The management plan is strategically structured so that each creditor gets a payment on the outstanding debt until it is paid in full. Completion of a DMP normally takes 3 to 5 years. A plan can be negotiated by:

• Charitable organizations like churches

• Non-profit businesses

• Credit counseling agencies

• Debt management providers

Most debt management provider companies also assist with debt settlement and debt consolidation, which consists of merging all debts into one bill. Debt settlement is an arrangement with creditors to accept a partial balance of the debt as payment in full. Debt settlements are harsher on a credit score than management plans, in which the entire balance is paid over time.

Advantages/Disadvantages

The best use of any form of debt relief starts with loading up on information beforehand. Credit counseling is highly recommended first step. In fact, it is often a requirement prior to arranging a payment plan. This tool can help consumers identify the reasons for their money problems and teach better financial habits. Credit counseling sessions also provide useful information about debt management plans, including pros and cons that will help in making sound decisions.

Likely Advantages:

1. Offers huge savings with reduced interest rates
2. Develops better financial discipline and organization
3. Improves credit score over time
4. Reduces collection activity
5. Resolves debt quicker due to lower interest and fee waivers

Possible Disadvantages:

1. Unable to add tax, educational, or medical debt to the plan
2. Cannot apply for or use additional credit until finished
3. Won’t be allowed to miss a payment and keep lower interest rates
4. Isn’t always cost free. A portion of the monthly payment may pay for the cost of the plan.
5. Doesn’t start immediately. The borrower may have to make a couple of payments on debts initially.

Credit Implications

Credit reports include a notation that a consumer is enrolled in a debt management plan. But unlike bankruptcy, a DMP does not have a direct negative effect on a credit score. Participation in a plan is not a factor in evaluating a score. Late or missed payments to the plan will lower the credit score, though, like any other debt.

Compliance with a managed plan does lead to reestablishing good credit. The amount of debt owed will be much less at the end of the plan, which means a higher score.  Consistent payment history, which is 35% of the score, also adds points. And since applying for new credit is not allowed in the plan, the credit report will show that there were no new credit inquiries during the years the plan was in effect, which has a 10% impact on the overall credit score.

While some debt management plans come with a small set-up payment and monthly maintenance fee, these costs come nowhere near the price of interest and destruction of credit when bills are left unpaid. Bad credit also comes with sky-high insurance costs and loss of employment offers, among a lot of other financial bad news. Which is why it pays to explore whether a debt management program is the right financial move sooner rather than later.