What is a debt management program?
A debt management program (DMP) is an assisted form of debt consolidation. You sign up for the program through a credit counseling agency that administers the program and negotiates with creditors on your behalf. Once you enroll, unsecured debts like your credit cards are rolled into a single monthly payment that works for your budget. The agency negotiates to reduce or eliminate the interest rates applied to your debt, as well as to stop penalties.
How does a debt management program work?
- First, you call a credit counseling agency to evaluate your financial situation.
- The counselor will review all of your options for debt relief; if a debt management program is your best option and your debts qualify then you begin the enrollment process.
- You provide a list of the account numbers and creditors you wish to include, then work out a monthly payment that works for your budget.
- There is a setup and monthly maintenance fee that are rolled into the program payments – fees are typically capped at $69.
- The credit counseling agency then contacts each of your creditors to get them to approve the inclusion of that particular debt in the program.
- During that discussion, the credit counselor also negotiates to reduce or eliminate the interest rate applied to your debt and stop all future penalties.
- Once all of your creditors have signed off, you being making payments on the program – you make one payment to the agency and they distribute the payment amongst your creditors as agreed.
- Since your creditors agree to the program, there is no negative credit damage created by using a debt management program successfully.
Debt management program pros and cons
The benefits of a debt management program
This is what clients typically gain from enrollment in a debt management program:
- Your total monthly payments are reduced by 30-50%
- Your interest rates are typically reduced to 0-11%
- In most cases, people successfully complete the program in 36-60 payments, so you’ll be out of debt in less than 5 years
- It simplifies bill payment, since you only have one payment to cover all of your debts.
- It saves your credit from further damage and may even help you build credit as you successfully complete the program.
The downsides of enrolling in a debt management plan
There are some tradeoffs that you need to understand before you enroll in a debt management program:
- All credit card accounts included in the program will be frozen – so you won’t be able to use these account while you’re enrolled
- You can’t apply for new credit cards while you’re enrolled – you can get approved for loans, but not open-ended revolving credit
- Your creditors must sign off in order for those debts to be included. For major credit issuers, this usually isn’t an issue. However, smaller creditors like payday loan companies may not be as willing to allow their debts to be included
- If you don’t complete the program successfully, the payments you make still count towards debt elimination, but interest rates and penalties may be restored to what they were before you enrolled.