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Debt Mangement Plans

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#1 radi8

  • Admin
  • 27,405 posts

Posted 14 July 2009 - 10:54 PM

....If only there was a way I could make just one payment to cover all my cards.
....I could manage my monthly payments if only my interest rates were lower.
....I've tried contacting my creditors about hardship plans and am getting nowhere with them.

Those are the selling points for DMP's- Debt Management Plans- a tool commonly utilized by consumer credit counselors.
In a nutshell, a DMP is an agreement between you, the creditor and the consolidator that allows you to make a single monthly payment to the consolidator. The consolidator distributes the payment to your creditors. In return for the promise of monthly payments, most creditors offer concessions in the form of lowered interest rates and fee waivers.
Good, right?

The good:

Lower Rates.
A properly implemented DMP can lower your interest rates. Depending on the creditor you might see anywhere between no reduction at all- and zero percent interest. Many of the large creditors are offering plans in the 6-9% range right now.

Lower payments.
Aside from the lower interest rates, a good DMP can lower your monthly payments. Depending on the creditor, you can expect your monthly payment to be between 1-3% of the balance.

Waived fees.
Certain creditors will agree to waive late, over-limit and other fees once you've made a certain number of on-time plan payments- typically 2 month's worth.

Reduction or cessation of collection calls.
A DMP is a repayment agreement. If your creditor agrees to the DMP, there is no purpose in calling you for collections. You've already put a payment plan in place.

Financial reviews and budgeting help:
The better credit counselors will spend considerable time with you reviewing income, expenses and your financial situation. They may provide tips on staying within a budget, and help creating that budget. They should also help you understand all of your options, from bankruptcy or a DMP to doing nothing at all, and help you find the option that fits your situation best.
Note: A counselor that pushes a DMP before reviewing your specific situation isn't a counselor at all- they are a DMP salesman. You should look elsewhere.

A good debt management plan doesn't destroy your credit- it preserves it or at least prevents further damage. At it's best you'll pay off your accounts in 2-5 years and be left with nothing but closed, zero-balance accounts.

The bad:

Well, there are problems.
- In the past this has been an industry inundated by scammers. Many of them have been shut down by the FTC, but there are still huge differences between the companies in terms of complaints. You must still be very careful selecting a company to work with.

-A DMP is voluntary. Your creditors do not have to accept your proposal. You may not learn your proposal was not accepted until several months have passed and you are quite late or charged off unless you keep payments current on your own.
Some creditors will refuse to accept a consolidation plan (Credit One bank is one that will reportedly not), others will refuse to lower your interest rates (most cards issued by GEMB)

-Due dates with your creditors sometimes do not align with the disbursement schedules of some consolidators, leaving you with late payments every month.

-A DMP offers no legal protection and cannot prevent lawsuits.

-Your creditors may report your account in a negative manner, possibly as a R9 (voluntary repayment plan), viewed by some creditors as the equivalent as a chapter 13 bankruptcy. Or worse, the account may be charged off and reported as "late" every month- see the due date problem above.

The Ugly:

The debt consolidation industry still has it's bad apples. You have to choose very wisely, make sure you understand what you are agreeing to- and follow through by monitoring the accounts and your progress.

You have to be reasonably sure you can complete any plan you start. Many creditors view a DMP as a one-time offer and will not agree to a second plan in the future.
Some even add the interest and fees they waived back on to the account- and raise you to default rates. They may do so if you miss a single plan payment- or your consolidator misses the payment on your behalf.
DMP's are definitely a case of "If you can't finish it- don't start it". The mess you are left with may be worse than that with which you started.

A DMP can be extremely helpful, or extremely damaging. The difference often rests entirely on your choice of companies and your diligence monitoring the plan.

Note: None of this refers to debt "elimination" or "settlement" plans which are entirely different than a DMP.

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