How Do Debt Management Plans Work

The following page explains how debt management plans work, what they are, whether they are a good, and how to differentiate scams from reputable debt management companies. It also offers some tips to ensure your debt management plan is successful.

What is a Debt Management Plan?

Debt management plans, or DMPs, are offered by credit counseling agencies to help people get out of debt. A DMP consolidates debts into a single monthly payment after the credit counseling service negotiates better interest rates, fee waivers, and longer credit terms on behalf of the consumer. Debt management programs typically last three to five years, during which time clients deposit a fixed amount of money each month that is then distributed to creditors. The fact that a person is in a DMP is recorded on that person's credit history, but participation in a DMP is not a factor included credit score calculations. Individual lenders, however, may use the information in the credit report in their decision about whether or not to extend credit to a particular person.

When is a DMP a Good Idea?

Debt management programs are not for everyone. However, a DMP may benefit you if:

• You struggle to make minimum payments on credit cards or other lines of credit
• You are being pursued by creditors or debt collection agencies
• You are often late paying your regular bills (utilities, phone bills, etc.)
• You have tried negotiating with creditors but were not successful

How do you know if a DMP or Credit Counseling Service is a Scam?

Unfortunately, not all credit counseling agencies are legitimate. A scam agency could pretend to sign you up for a DMP and just pocket your money, leaving you even worse off. Before signing with a credit counseling agency, find out the following:

• Does your state require credit counselors be licensed? If so, is the service licensed in your state?
• Does the service offer free information on what they do?
• Does participation require a formal written agreement? If not, be very wary.
• Does your state's attorney general or your local Better Business Bureau have any negative information on the agency?

After committing to work with a credit counseling service, do the following:

• Contact creditors to ensure they have accepted the DMP before making payments to your credit counseling service
• Check your bills and statements to be sure that your DMP is in fact making payments it is supposed to make
• Always make your DMP monthly payments on time
• Immediately contact the credit counseling organization that created the DMP if you discover that creditors aren't being paid

How do you Make Sure your DMP is Successful?

If the credit counseling organization that designed your DMP offers services like debt management classes and help with budgeting, take advantage of these services to prevent debt from getting out of control after the DMP ends. Always make DMP payments on time and check with creditors to ensure they are being paid from the DMP. Once a year, obtain copies of your credit report and check them carefully for errors. You don't want a mistake on your credit report needlessly holding your credit score down. The best sign of a successful DMP is a consumer who resists falling back into unmanageable debt.

Sources:

http://www.creditcards.com/credit-card-news/erica-sandberg-pros-cons-debt-management-plans-1377.php
http://www.bankrate.com/finance/debt/debt-management-program.aspx
http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre38.shtm