Definition
A Debt Management Plan (DMP) is a structured repayment program administered by a credit counseling agency that helps consumers pay off unsecured debts over 3-5 years. When you enroll in a DMP, the credit counseling agency negotiates with your creditors to reduce interest rates, waive fees, and stop collection activities. You then make a single monthly payment to the agency, which distributes the appropriate amounts to your creditors. DMPs are not loans, and they don't reduce the principal amount owed. They work best for unsecured debts like credit cards and medical bills; secured debts like mortgages and auto loans typically aren't included. Successful completion of a DMP results in full repayment of your debts, usually at a lower total cost and in less time than making minimum payments at regular interest rates.
Frequently Asked Questions
What are the benefits and drawbacks of a debt management plan?
Benefits of a DMP include: reduced interest rates (often by half or more); waived late fees and over-limit fees; consolidated payments; structured payoff timeline (typically 3-5 years); ending collection calls; and potential credit score improvement over time. Drawbacks include: requirement to close credit accounts in the plan; limitations on obtaining new credit during the program; monthly administration fees (though typically modest); all creditors may not participate; and potential initial negative credit impact when accounts are closed.
How much does a debt management plan cost?
Costs vary by agency, but legitimate non-profit credit counseling agencies typically charge: a setup fee ranging from $30-$50, and monthly administration fees ranging from $20-$75 depending on your state and the number of creditors in your plan. Some agencies waive fees for financial hardship. These fees are substantially lower than debt settlement company fees, and reputable agencies won't turn you away if you can't afford them. Always verify fee structures before enrolling, and be wary of agencies charging high upfront fees or calculating fees as a percentage of your debt.
Will a debt management plan hurt my credit score?
A DMP has mixed effects on your credit score. Potential negative impacts include closure of credit accounts (affecting credit utilization and account age) and notation on credit reports that accounts are being paid through a DMP. Positive impacts include establishing consistent payment history, reducing debt balances, and eventually having accounts reported as 'paid in full.' The initial impact may be slightly negative, but as you make consistent payments and reduce balances, your score typically improves over time. A DMP impacts credit much less severely than debt settlement or bankruptcy.
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