Debt management plan

A Debt Management Plan (DMP) is a method used in various countries for paying personal unsecured debts (which typically have gotton all out of control in the sense of payments due taking too large a portion of income, or even exceeding it) that involves cataloguing all the debts, assessing income and budget, and re-negotiating interest rates and payments with the lenders, based upon evidence that the result will be a higher likelihood of collection by the lenders.

A DMP is typically run by non-profit consumer credit counseling services that may be funded by creditors to collect and distribute money. In this model, repayment plans are developed by creditors telling the groups what the creditor requirement is and rewarding the group by paying them a percentage of funds collected from debtors and sent to creditors. This percentage of funds is often referred to as "Fair Share". In recent years, creditors have significantly reduced or eliminated fair share payments.

The result has been the creation of many fee-charging services who do not accept fair share payments, but rather charge consumers a fee for their service. However, these have little control over creditors either.

The for-profit model of services allows the consumer to sign up for a service that is not run entirely by their creditors.

In the United States the Internal Revenue Service (IRS), the regulator of charities, has raised grave concerns about the validity of the charitable status of many non-profit credit counseling agencies. The IRS states "Although many credit counseling organizations provide valuable services to persons who find themselves in debt, the IRS is concerned that some have used their tax-exempt status to circumvent consumer protection laws and take advantage of those who are already in financial distress."

The IRS also made it clear that funding to credit counseling groups is nothing more than paid debt collection. Typically a credit counseling group calls these payments 'Fair Share' payments instead of debt collection compensation. The IRS stated , "Fair share payments are payments made by some credit card companies to credit counseling organizations based on the amount the organization collects from the consumer."

One of the concerns raised is that credit counseling groups that are paid for services by creditors is in fact nothing more than debt collector masquerading as a charity since they provide a commercial service, debt collection, to creditors for revenue and income. It would be hard to find a charitable purpose and mission in that activity.

The IRS also stated "The examinations completed thus far have uncovered abuses involving organizations that: fail to provide education; operate as commercial businesses; and serve the private interests of directors, officers, and related entities." It is true that in a DMP with a credit counseling group that a debtor may be able to gain some relief from interest rates or fees but that is granted solely at the discretion of the creditor.

There is an incorrect perception that DMPs are a formal arrangement with creditors - in the end, whether the debtor uses a free creditor sponsored DMP or a fee-charging DMP company, accepting any terms of a DMP proposal put forward on behalf of the debtor is accepted always at the discretion of the creditors. A good debt advice service recognizes this and will only suggest a debtor pays what they can afford after their priority costs (mortgage, utilities, food etc) no matter what.

Fee-charging Debt management plan companies will often charge up-front fees as an 'admin' charge, and then will charge a percentage of the surplus that is paid to the creditor as a fee to the debtor. The larger the payment the debtor is encouraged to make, the larger the fee the fee-charging DMP company receives. Also, there is the possibility that a fee-charging DMP company will enter a debtor into this kind of arrangement when it is not in the debtors interest and bankruptcy might be a better alternative, especially if the debtor has large debts and it would take them many years to pay their debts back this way.

The longer the debt takes to pay back, the more money the fee-charging DMP company will collect its fee directly from the person with debt - money that could be going to clear the debt itself if no fees were charged to the debtor.

People that use a DMP to eliminate their debt will typically only have unsecured debts such as credit cards included in their plan. Secured debts, like mortgages, car payments, rent and utilities, are not subject to monthly payment reductions. Unsecured debts that are not listed on the DMP may be closed by the creditor once they are notified of participation.

When someone participates in a Debt management plan it is usually marked on the credit reports. FICO has publicly stated, however, that they do not include DMP status as a factor in determining credit score. Therefore, the impact of the DMP on one's ability to get credit varies widely depending on their history before the DMP, the consistency of their payments while on the DMP, the type of credit they are requesting, etc. Generally, DMP is considered to have the least effect on credit compared to other debt repayment plans, such as debt settlement or bankruptcy.

Source: http://en.wikipedia.org/wiki/Debt_management_plan

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