Credit Counseling: Debt Management Plans

Managing Debt

Consumers can turn to credit counseling organizations when they are overwhelmed with financial problems. If they have done their homework and found a good credit counseling service, part of the counseling session will be options for paying down debts. One choice is enrolling in a debt management plan (DMP) if their debts are large, and they have a limited ability to repay them. These plans exist separate from the counseling services, and they are not suitable for everyone. DMPs should only be enrolled in after a reputable credit counselor has reviewed the consumer’s financial situation and given detailed advice on managing and budgeting the consumer’s finances.

Debt Management Plans

In a debt management plan, consumers deposit their money with a credit counseling agency. With the deposits, the agency pays the consumer’s unsecured debts—medical bills, credit card bills, student loans, etc—according to a payment schedule worked out between the consumer, the counselor, and the creditors. In the revamped payment plan, creditors may consent to a lower interest rate and cancel certain fees on the debt. Yet the consumer needs to be pro-active and check with the creditors to establish if they have agreed with the new terms, as credit counseling agencies sometimes do not carry through in contacting the creditors. DMPs can require 48 months or longer to pay off the debts, and the consumer should ask about the time frame involved. Usually, the consumer agrees not apply for new credit or use credit during this period.

Getting Answers to Important Questions

Asking the right questions will help the consumer understand how  a debt management plan works and the role the consumer plays in its implementation. These questions should aid the consumer’s understanding of DMPs:

  • What options does the credit counseling agency offer to help the consumer pay back debt? If the response is only a DMP, this is a red flag and the consumer should look elsewhere for credit counseling. Credit counselors should always offer guidance in money management skills and create a workable budget for that specific individual.
  • What determines the amount of the payment deposited each month with the credit counseling agency for bills? If the amount is more than the consumer can afford, of course, the individual should not sign up for a DMP.
  • Are all the debts included in the DMP or are some bills still left to the consumer to pay?
  • Will creditors be contacted to lower interest and finance charges or waive late charges? The consumer needs to follow up on the counselor’s assertions to make sure that they are carried out with the creditors.
  • Do the creditors require the consumer to make any payments to the credit counseling service before becoming involved with the DMP? If the credit counselor tells the consumer a payment must be made, it needs to be verified with the creditor(s) before a payment is sent in.
  • Will creditors be paid on appropriate due dates and in the proper billing cycle? The best DMP is one that will make payments before a bill’s due date.
  • Will the creditors “re-age” the consumer’s accounts? If debts are re-aged, they are made current. However, negative information will still stay on a credit report.
  • Will the consumer receive detailed status reports from the credit counseling agency on a timely basis? Can the account be accessed online or by phone? The consumer has a right to be kept abreast of his or her account to see the progress being made.  

For some consumers, a DMP works well to help them climb out of debt since it involves negotiated payments to creditors with lower interest rates and fee waivers. However, it is up to consumers after receiving credit counseling to decide if a debt management plan will work for their situation.

Reference:

1. Federal Trade Commission, For People on Debt Management Plans: A Must-Do List, December 2005, http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre38.shtm