A debt management program, known as a “DMP” is a program in which individual debts are consolidated into one monthly payment that is distributed on your behalf to your creditors. Debt management programs are not a loan. DMPs are popular in that many enrollees receive a significant interest rate reduction for their participation in the program. Read through below to help determine if a debt management program is right for you.
How does a debt management program work?
- Typically a credit counselor will evaluate your debt, your expenses and your budget.
- If you qualify (see not everyone qualifies) – The debt management company will negotiate an interest rate reduction for your participation in the program.
- Instead of paying multiple creditors, your accounts are consolidated into one monthly payment to the dent management company.
- The debt management company handles payments to all creditors, ensuring on time payments and provides summary statements back to you.
- Debt management programs typically run from 2-5 years.
Not everyone qualifies for a debt management program
Those who qualify for a debt management program typically carry higher credit card balances. Student loans, tax obligations, and other types of debts are seldom included in a debt management program. Another instance when a debt management program may not be the best solution is when your troubled debt is less than 15-20% of your annual income. In that case, consulting a certified financial counselor along with budgeting classes is most likely a better road to take.
Finding a debt management program that’s right for you
A “must-do list” published by the FTC warns of counseling agencies that charge high fees, may allude that a debt management program is your only option and even deceiving and defrauding consumers. Organizations that are nonprofit, like National Association for Debt Education & Assistance, are required to employ certified financial counselors who are trained in consumer credit, money and debt management and budgeting. The FTC noted, “Those organizations that are nonprofit have a legal obligation to provide education and counseling.” You can find more information about credit counseling agencies as well as find nonprofit agencies through the Consumer Financial Protection Bureau.
Alternatives to debt management programs
If you find that a debt management program is not something for you, or you do not qualify for a debt management program, there are a number of alternatives to consider.
- Can the debt be handled by yourself? Perhaps by negotiating with your creditors.
- Can the debt be handled with an isolation method? Such as the debt snowball or debt avalanche methods?
- Is your credit good enough to qualify for a loan at a lower average interest rate? A debt consolidation loan may be an option if it is.
- If your debt exceeds a certain amount of your annual income, say 50%, you might want to consider bankruptcy