What Is A Debt Management Plan And How Does It Work?

Debt Management Plan, as by Wikipedia:

"A debt management plan (DMP) is a method used for paying personal unsecured debts (which typically are out of control in the sense that payments are late and those due are taking too large a portion of income, or even exceeding it) that involves noting all the debts, assessing income and budget, and re-negotiating interest rates and payments with the lenders, based upon evidence that the result will be a higher likelihood of collection by the lenders due to the debtors more realistic monthly repayment."

Debt management, by standard financial definition, involves a 3rd party that assists a debtor with the repayment of his or her debt. Debt Management Plans also known as DMP are designed to help people with heavy debt and high interest rates and get their financial situation under control. A simpler definition of a DMP is a structured repayment plan set up by a designated third party as a result of personal initiation.

A debt management plan entails a series of steps, which the third party service works on with the help of the debtor. The initial step typically involves compiling a list of all creditors including the amounts owed to each of them. Some creditors aren't eligible to be included in a debt management plan, and typically, secured debt such as car loans and home loans are not included.

Once a list of creditors is compiled and the amount of debt is totaled, the debtor’s total income and expenditures, such as mortgage or rent payments, car payments, cost of living expenses, and so forth, are totaled as well. The third party agency assisting with the debt management plan then helps the debtor to determine the maximum amount of money available to allocate to the plan for debt repayment. In many cases, a third party service will attempt to settle some debt amounts and exclude or lower any interest charged during the repayment period.

If you have less than 3,000 US dollars (USD) of debt, you may not qualify for a third party (DMP) service.

Here are a few things to consider when participating in a debt management program

• You'll need a minimum of $3,000 of debt (and not currently in collections). There must be enough debt to make the program beneficial for you. You can add old utility bills if your current debt is over $3,000, but the benefits to you is none, the debt management company will simply be acting as the paying agent.
• Accounts in collections for 30-60 days may be included in the DMP but there is no guaranty that it will be accepted. However the DMP 3rd party will attempt to get proposals accepted but again there is no guaranty due to the collection status of the account.
• Accounts included will be closed by your creditors and if you have multiple accounts with a creditor the other accounts will be closed.
• Accounts that have been in collections for more that 60 days have an even lower chance of being accepted
• All accounts need to have been open for a minimum, of 6-9 months if they're to be included. If you would like to include an account that is younger you can but the proposal will not be sent out to the creditor until the account has matured.
• Typically your interest rates should be above 14-17% and you should be making the minimum payments. This is considered to be a hardship program so if you’re making more than the minimum payments the less likely you are going to be approved.
• Once you have enrolled it is recommended that you not pursue any new financing for 12-24 months.

A debt management plan is not a loan.

Will this affect my credit rating?
A creditor does have the right to report that you are in a DMP. This does not affect your actual credit score however when attempting to obtain new financing this can sometimes be a disqualifying factor. Typically banks want to see you out of a DMP before they lend you money. This mostly applies to larger loans such as financing obtained for the purpose of a refinance or the purchase of a new home. If you make your payments as designated through the program then your credit scores will most likely improve.

What to Do If You Don't Qualify

If you find yourself in the unfortunate situation of having your debt with collections for 60+ days or you can’t afford the payments proposed through debt management then it’s time to consider a more aggressive approach such as debt settlement.
Via Online Debt Settlement Relief Help and Information.

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One Response to this post

  1. Tours with Shoki on June 10, 2009 at 10:39 PM

    wow, great searching , it’s really amazing