Debt Consolidation and Debt Management Plans

One of the services that credit counseling agencies provide is debt management plans, or DMPs. A DMP is a plan that a counseling agency develops with a client's creditors to help a client consolidate (pool together) and pay off their debt. That plan can include reduced interest rates, lower monthly payments and the elimination of late fees. The counseling agency will work directly with your creditors to work out a payment agreement for the remaining debt that you owe. Then each month you send a check to the credit counseling agency, which the agency then uses to pay off your creditors. Debt management plans typically last for 3 or 4 years.

Credit counseling agencies make money in two ways from their clients' DMPs - they receive a percentage of clients' monthly debt repayments back from their creditors every month and they charge clients a one-time and/or monthly fee for the DMP.

Using a credit counseling agency or even have a debt management plan with a credit counseling agency will NOT negatively affect your credit rating. However, most credit counseling agencies will strongly discourage clients from applying for new credit while enrolled in a DMP. In addition in most cases you will have to agree to cancel all credit cards that you include in your DMP. While potential new creditors have the ability to see on your credit report that you are using a credit counseling agency and/or are enrolled in a DMP, since those factors do not affect your credit score (and that is what they use to make a decision on your application for credit), it will not likely affect your ability to secure new credit.

If your credit counseling agency suggests a DMP, ask the following questions:

  • Do I send the monthly check to you or somewhere else (i.e. directly to my creditors)?
  • How do I know if you have paid my creditors the agreed-upon monthly amount ON TIME?
  • How and when will I be updated on the status of my debt repayment?
  • What happens if I can't meet the terms of the DMP?
  • How much do you charge for a DMP? Do you have an initial DMP creation fee and then a monthly administration fee as well?
  • What percentage of my debt repayment do you receive back from my creditors as payment?

While a DMP can seem like an attractive option, it's important to take a very close look at what the monthly payment on the plan is going to be and IF you can realistically make that payment. Even the best DMP is not going to help you reach your goal of getting out of debt if you can't afford to make the monthly payments. If you are hesitant, talk with your counselor and spend the time to work through a realistic repayment schedule before committing to a plan. It will greatly increase your confidence in, and the long-term success rate of, the DMP if you start off by being honest with yourself and your counselor about how much you can afford to repay each month.

Even if you have a DMP with a reputable credit counseling agency, you still need to closely monitor your monthly credit card statements or other bills that your DMP is paying off to be sure that the agency is making the appropriate payments ON TIME every month. And it's still your responsibility to check the accuracy of your credit report as well. Click here to learn how you can get a free annual copy of your credit report.