Home > Debt Consolidation > How to consolidate debt > Debt Management Program (DMP)

Debt Management Program (DMP)

Related resources:

A Debt Management Program (or "DMP," and also called "debt management plan," "debt consolidation plan," "debt management repayment plan" or simply "repayment plan") is a program under which you agree to make a fixed monthly deposits to a credit counseling agency which in turn distributes the funds to your creditors until your unsecured debt is paid off in full, typically within 36 to 60 months (depending on the repayment schedule developed by the credit counseling agency based on your personal financial situation).

The credit counseling agency will contact your creditors and attempt to negotiate lower interest rates, a reduction or elimination of past fees, flexible repayment arrangements, and an easing of collection calls. There is no negotiation involving the outstanding principal balance of your debt, so you will still have to repay the entire amount of your debt. Because you are still paying 100% of your obligations, you will not have your credit score so adversely affected as is the case with debt settlement and bankruptcy.

While you are enrolled in a Debt Management Plan, you will usually have to agree to not use any additional credit or apply for new credit. All your credit card accounts will be closed upon entering into a DMP (perhaps with the exception of a single account for emergencies purposes).

In addition, some creditors will add a notation to your credit report indicating that the account is being managed through credit counseling (a "CC notation"). Some creditors will not approve you for a loan based on this notation, which however is neutral and doesn't affect your score. In addition, regardless of wheter this notation prevents you from taking out new loans or not, you are in any case asked by the credit counseling agency to not apply for new loans as a condition of being enrolled in the DMP. This notation will be removed once you complete the program (if it's not removed, you can call your creditor and ask them to fix the inaccuracy).

Your credit score is not affected by a DMP in any significant way, other than a decrease if you are asked to close your current credit card accounts and lines of credit. This action, in fact, will increase your credit utilization rate, or debt-to-credit ratio, which can have the effect of decreasing your credit score.[1] [2] You score could actually improve if your creditors start to collect payments from you in a more regular and timely manner.

With a Debt Management Plan (DMP), you continue to receive your monthly statements from your creditors just as before, but these will show that a payment was applied through the DMP. Review the monthly bills to make sure the payment was applied correctly and on time. At any time, you are free to terminate a DMP or accellerate it by sending in extra funds. The plan can be also reviewed should your circumstances change.

Each creditor can accept or not accept the proposed plan. Any creditor who doesn't acceptthe DMP, will have to be paid outside of the plan by you. In order to be approved for a DMP, you must show that you have sufficient income to make the monthly payments.

Are Debt Management Plans a form of debt consolidation?

It is a matter of debate wheter DMPs can be even considered a form of debt consolidation, since they are structured more like a bill paying service. With DMPs, you are not taking out a new loan to pay off your existing accounts (the common case with debt consolidation). Rather, you are making a monthly payment to the agency which then pays your creditors on your behalf.

However, DMPs seem to offer more than just the convenience of making only a single payment each month rather than having to pay multiple lenders (which in any case is one of the fundamental characteristics that define debt consolidation, provided that the principal balance is not an object of negotiation, as with debt settlement).

Debt Management Plans advantages

DMPs might provide the following benefits:

  • Reduction of the interest rate charged by your creditors (which should result in a lower monthly payment required from you). A reduction in the annual APRs is crucial and could make all the difference between being able to repay your debt in 3 to 5 years rather than 20 or more years if the high interest is allowed to compound. Some creditors will lower the interest rate as soon as they accept the debt management proposal. Others will wait to see a few (typically three consecutive) succesfull monthly program payments before lowering the rate.
  • Consolidation of multiple monthly payments into one monthly payment. Having to make a single payment, which remains constant for the entire duration of the program, makes your money management and planning easier and more efficient.
  • Reaging of delinquent accounts to reflect current status. Creditors who accept the debt management proposal will "reage" or "cure" a delinquent, open-end, account and bring it to current status (without collecting the full balance due) once you make 3 payments through the DMP. Federal law allows an account to be re-aged at most once within a year and no more than twice within a five year period.[3] Prior delinquencies will not be removed from your credit report, but by becoming current you will have a chance to start rebuilding your credit and eventually improving your credit score.
  • Elimination of late fees. In addition to a reduction in the interest rate, the agency might be able to negotiate an elimination of the late fees applied to your account in the past.
  • No more (or at least less) collection calls. After making the first three DMP payments in a timely manner, creditors will usually stop calling about overdue accounts and terminate their collection activities.
  • No origination fees (compared to the cost of taking out a new loan to consolidate your debt).
  • Credit counseling and support. A reputable credit counseling agency will continue to provide credit counseling services alongside the DMP.
  • Your debt is repaid in full. That is, if you are able to complete the program, which happens in an estimated 25% of times.

Debt Management Plans disadvantages

  • If you are disciplinated, you could do the exact same thing by yourself without having to pay the agency's fees (usually ranging between $10 and $50 per month, and lasting for several years): you can call your creditors and try to negotiate a lower interest rate and then put yourself on a plan to pay off the debt in 3 to 5 years with constant monthly payments and no new charges on your cards. Start by paying off your highest rate debt first and progressively close all other accounts. Some have gone so far as to argue that DMPs are simply a way on the part of creditors to have the consumer pay for the cost of collection. This is partially true, even though creditors still finance a large portion of this collection effort through their "Fair Share Contributions" paid to credit counseling agencies, calculated as a percentage of the amount succesfully collected through a completed DMP.
  • Some creditors might not participate in the DMP, so you will have to handle that portion of your debt by yourself.
  • Low success rate. It is estimated that only between 21% and 54% of participants in a DMP actually complete the program. Simply missing a payment can result in the DMP falling through. The completion rate is low despite the fact that the agency's screening process only accepts about 25% of clients into a DMP, as there is the natural tendency to "cherry pick" and enroll clients that have the highest probability of completing the program, as the agency will earn a fee (the"Fair Share Contribution") from creditors based on the amount of debt the agency is able to collect for them through the repayment program.
  • Some credit counseling agencies will propose a DMP even if it's not appropriate for your personal financial situtation, but just because it is the main source of revenue for them. Don't sign up for a DMP unless you feel that the credit counselor has spent an appropriate amount of time reviewing your situation and has offered customized advice as well as money management and budgeting skills. A DMP can be unneccesary or even damaging when done for the wrong reasons.

References

back to top ↑

  1. "Will closing a credit card account help my FICO score?." myFICO. Fair Isaac Corporation.
  2. "Why closing a credit card can hurt your credit scores." Experian Information Solutions, Inc.
  3. Uniform Retail Credit Classification and Account Management Policy. Federal Deposit Insurance Corporation (FDIC).