About Debt Management Plans

Debt is a way of life for the typical American, with most people having mortgages, auto loans, school loans and/or credit card debt. When debts become overwhelming, searching for a solution to your financial difficulty is a logical next step. In some circumstances, a debt management plan (DMP) can get you back on track, but DMPs aren't for everybody.

What Is a Debt Management Plan?

A debt management plan is a systematic, organized method for repaying debt. The purpose is to get your debts under control and give you more solid financial ground.

How Debt Managment Plans Work

When you opt for a DMP, you give all the money you'd normally pay to your creditors to a debt management company. The debt management company takes responsibility for your bills, sending the right amount to each creditor. In return for handling your debt, the debt management company charges you a monthly fee.

Benefits

A primary benefit of DMPs is that you no longer have to struggle to work with every creditor every month. You can make one quick, easy payment to the debt management company, and they do the rest. This can be a huge stress reliever. In some cases, debt management helps you avoid larger financial disasters like bankruptcy, with the debt management company often negotiating lower interest rates with creditors. Debt management can reduce or put an end to harassment from creditors, since the creditors are receiving payments from and dealing with the debt management company instead of you.

Drawbacks

The fact debt management allows you to make just one payment can provide peace of mind, but it also puts all your eggs in one financial basket. You have to trust that the debt management company won't make a mistake, and sometimes, they do, leaving your money improperly distributed. The fees debt management companies charge often are hefty, which can worsen your financial situation. You also can't write off the debt involved in a debt management plan the way you can when you use debt settlement. Using a debt management company also shows up on your credit history and can lower your credit rating. Finally, creditors don't have to agree to debt management. If your creditors don't want to be part of your DMP, you can't force them into it.

Should You Use a DMP?

For some people, using a DMP is the right option because, with a good company, the immediate debt obligations are handled promptly, and money is saved on what you owe. Depending on how the company negotiates and the fees they charge overall, you might only break even financially -- that is, the real benefit of a DMP is the reduction of stress. Debt management companies, unless they provide credit counseling as part of their service, do not teach you the effective financial strategies that will prevent you from needing a DMP again in the future. It's a lot like letting your mom do your financial laundry. If you want to prevent hassle in the future, you may be better off with free counseling from a non-profit credit counseling agency.