What is a Debt Management Plan?
A debt management plan (or DMP) is a way to get yourself out of debt and rebuild your credit, all while making monthly payments that fit your budget. They can be extremely beneficial for someone who is in over their head with debt and needs help getting a handle on it.
While participating in a debt management plan, you’ll also learn how to manage your money better so that you can avoid falling into debt again in the future.
But how does it work? Is there a cost? And how do you sign up for one? Here’s what you need to know.
How Does It Work?
A debt management plan is a system that allows you to pay one monthly payment that covers all of your included debt. Essentially, once your creditors agree to the plan, you make a single payment each month to the facilitator of your debt management plan. It’s not a loan, however, and your monthly payment is divided and dispersed to your creditors every month.
When you request a debt management plan and your creditors agree to it, they will often lower your interest rate and waive any late fees that you currently have. They will also agree to a set monthly payment that has your account paid in full in no more than five years.
While you’re in a debt management plan, your credit accounts will be closed and you will not be able to use those accounts for any new charges. You will also not be strongly discouraged from opening any new lines of credit, as creditors offer you perks (reduced interest, waived fees) with the idea that you’ll focus on paying off your debt and not creating new debts.
Is There A Cost?
Yes, but it’s not much and it will vary depending on the amount of debt you’re repaying and the state where you live. If you work with a nonprofit credit counseling agency, there will likely be two fees: an ongoing monthly fee and a one-time set-up fee. Monthly fees may be a percentage of your monthly DMP payment, or a flat fee (again depending on your state of residence).
At MMI, the average monthly fee is $24, with a maximum of $50. The average set-up fee is $33, with a maximum of $75. Fee waivers and fee reductions are available for consumers with hardships – just ask your credit counselor if you qualify.
How Do You Sign Up for One?
Your best, and easiest, bet is to work with an accredited nonprofit credit counseling agency. They’re not all the same though. Do your homework and search their Better Business Bureau ratings to find a reputable company.
Contact the one you’re most interested in working with and schedule an appointment for a complimentary counseling session. This will allow you the opportunity to discuss your financial situation with a credit counselor, review your options, and see if a debt management plan is right for you.
If you’re not opposed to putting in some long hours on the phone, you can set up your own debt management plan. If you’re having trouble keeping up with your payments, creditors may be willing to work with you. But there’s no guarantee that you’ll receive the same interest rate reductions and other benefits if you go it alone.
Making the decision to create a debt management plan can be a responsible way out of debt, but it’s not right for everyone. If you’re considering one, talk to a credit counselor about your options.