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The Best Debt Management Plan

Updated on January 6, 2011

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

A Debt Management Plan or DMP is a way setting up a consolidated payment schedule for all of your debts.

Is A DMP The Same As A Debt Consolidation Loan?

No, a Debt Management Plan is very different. With a consolidation loan, you take out one new loan and use it to pay off all of your previous different debts. You then only have one monthly payment to make.

When you have a DMP, you do not have to take out any new loans. Instead, you hand over the management of your debts to a credit specialist who will work out a monthly payment for you. They collect that amount for you and distribute it between all of your creditors.

Usually, when you set up a DMP the credit counselor who is helping you will negotiate with your creditors to get you lower rates of interest wherever possible. In some cases, they may even be able to negotiate an agreement where you pay no interest at all.

They can do this because creditors know that anybody entering into a Debt Management Plan is serious about clearing their debts. Agreeing to give you lower rates will encourage you to make the payments. It is probably their best chance of having the bulk of the debt paid off. So that is why they will agree better terms with your counselor than they might agree with you as an individual.

Is There A Cost?

Yes, usually you will have to pay something to the credit counseling service to compensate for their time. There are also administrative costs involved in collecting the monthly payment from you and paying out to your creditors. However, if you are getting reduced interest rates as a result of being involved in a DMP, this will offset some or all of the administrative costs.

What Is The Effect On My Credit History?

Having a DMP on your credit report could have either a negative or a positive effect, depending on your past credit history.

A DMP shows that somebody has financial problems, so if your credit history has been perfect in the past, with no missed payments or other unpaid bills, then entering into a DMP may have a negative effect on your credit score. So for somebody with such a good credit history, a DMP may not be so helpful.

On the other hand, if you have a bad credit rating and many negative elements on your credit report, a DMP will show creditors that you are working to pay off your debts. This can increase confidence.

You should be aware that while you are making DMP payments, you will not normally be able to apply for other loans or use credit cards, except for one credit card in some circumstances (e.g. if you need it for your work). After the DMP has been completed and your debts are cleared, many creditors will be prepared to extend credit to you again.

In short, a DMP will usually have much less of a negative impact on your future ability to get credit than bankruptcy, which is often the only other option for people who are considering a Debt Management Plan.

Who Should Have A DMP?

A Debt Management Plan is sometimes considered as an alternative to bankruptcy for cases where a person has serious financial problems. Because of the costs and impact on the credit history, it is not recommended for everybody. If you can manage your finances to get out of debt without a DMP, it might be better to do so.

However, a Debt Management Plan can take a lot of the worry and uncertainty off your shoulders. You can concentrate on other aspects of your life, knowing exactly what your monthly payments will be. In many cases, the reduced interest rates and other benefits allow people to repay their debts when they might not otherwise be able to. That is why many people choose to set up a Debt Management Plan.

Debt Management Plan

How Does A Debt Management Plan (DMP) Work?


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