A debt management plan (DMP) is an agreement between a debtor (that’s you, the person in debt) and a creditor (think: your bank or your credit card company) that tackles your outstanding debt.
In a nutshell, a DMP groups your outstanding unsecured debts (like your credit cards and medical bills) into one payment and creates an affordable four- to six-year repayment plan. A debt manager will work with your creditors on your behalf to reduce your interest rates, waive or reduce any penalties, and lower your monthly payment.
If you’re feeling buried under the weight of multiple debts, a DMP might be the solution to escape the crush. But there are many things to consider before jumping into one.
Q. How do I choose a debt management agency?
The Federal Trade Commission recommends finding a reputable credit counseling organization that uses certified counselors trained in consumer credit and debt management. Watch out for scams, hidden fees, and fraudulent organizations. Before signing up with a company or paying them anything, be sure to verify that the organization is licensed. Check its track record with the Better Business Bureau, the local consumer protection agency, and ask your state Attorney General’s office whether there are any consumer complaints against them.
Q. What types of debts can I lump together in a DMP?
Unsecured debts, such as credit cards, store cards and personal loans, can be part of your DMP. Medical bills, utilities, and cell phone bills can also be included. Secured debts, like your mortgage or car payments, aren’t covered. Student loans aren’t covered, either.
Q. Does it cost to participate in a DMP?
There’s usually a one-time set-up fee and then a monthly charge for the administration of the plan. The amount of these charges is determined by where you live and will be calculated by your debt counselor, but set-up fees average $75 and monthly fees range from $25-$55.
Q. Can I still use my credit cards?
Any credit card bundled in your DMP will either be closed, or frozen. One of the conditions for lowering your interest rate and waiving penalty fees is that you lose access to the affected credit cards.
Q. Will creditors still contact me?
Creditors will stop calling as soon as you start a DMP, but they will continue to send statements. This is important because you should always review your statements from the creditors and compare them with those from the debt counseling agency to verify that your payments are being applied correctly.
Q. Am I locked into the payments?
As mentioned, your debt management plan will spread out your repayment over four to six years. If your circumstances change over that time and you find yourself unable to keep up with the payments you agreed to in your DMP, contact your debt management agency as soon as you detect a problem. They should be willing to adjust payments accordingly so you can keep up.
Q. What are other options to help me get out of debt?
If a DMP isn’t for you, you have other options, including:
- Debt consolidation loans have terms and qualifying for them depends on your credit score.
- Bankruptcy can be a potential option when you’re totally overwhelmed by your debt.
- Debt settlement has drawbacks that might make this a last resort.
Taking the step toward debt management is a big one. If you’ve been struggling to pay your bills but just can’t meet your financial obligations, it might be time to take that step. Before you do so, be sure to consider these questions carefully. If you still have concerns and want more information, please consider contacting DebtGuru.com. A friendly financial advisor on our team will present unbiased, expert guidance to help you decide whether to make this move.