Debt Management Plan (DMP)

A Debt Management Plan (usually abbreviated as DMP) is a means of handling unsecured consumer debts that a given debtor is having troubles with due to certain financial hardships (unemployment, loss of income, large medical or other fees, etc). The DMP method includes the following steps: cataloguing all debts of a given consumer, assessing his/her income and available budget and negotiating a change in the interest rates and payments that will suit the creditor and be affordable for the debtor at the same time. This method allows the debtor to get a relief from intolerable credit conditions and the creditor – to avoid suffering from a possible bankruptcy of the debtor.

A third-party group is usually entrusted with the establishment and the negotiation of a debt management plan for a given debtor. Available debt management plans can be of two major types, the first being just a remuneration of debtor’s available funds for debt repayment based on a percentage of debt. For instance, if a given debtor has $1,000 available monthly, and he owes 25% of his debt to Creditor #1 and 75% - to Creditor #2, then the division of the monthly repayment to the creditors will be carried out the following way: $250 will go to Creditor #1, and $750 – to Creditor #2, plus a certain amount of money will be paid for the services of the debt management agency dealing with this case.

The second type of debt management plans is established by special Consumer Credit Counseling agencies (CCC’s) that are funded and controlled by the creditors themselves. In this option, the creditor will dictate the requirements itself, rewarding the CCC group with a percentage of debts collected and forwarded on to it.

Using the variables from the example above, we can suggest that if the Creditor #1 had 25% of the net debt but demanded 40% of it and promised the CCC group a larger reward than the one promised by Creditor #2, there is a high probability of Creditor #1 getting $400 and Creditor #2 getting $600 during a given month.

The second type of debt management plans is thoroughly unfair, since it is the creditors who dictate the amount of payment they want to receive to the CCC agencies, so the distribution of funds turns out to be unbalanced

The validity of the charitable status of the consumer credit counseling agencies is utterly doubted by the US regulator of charities, Internal Revenue Service (IRS). The official statement of the IRS concerning the CCC agencies said, “Although a large number of credit counseling organizations provide valuable services to people 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 states the fact that consumer credit counseling agencies are funded by creditors themselves makes them perfectly similar to regular paid debt collectors. In the official documentation kept by CCC companies the donations from creditors are referred to as “Fair Share” payments while actually they are nothing but debt collection compensation.

Basically, the activity of consumer credit counseling organizations hardly has any charitable purpose and mission. Currently, more and more concern about this fact is raised by different law companies and the debtors themselves who say CCC’s to be ordinary debt collectors disguising themselves as charity non-profit organizations.

The checkups carried out by IRS have uncovered numerous abuses in the activity of CCC’s, namely: failure to provide education, commercial activity, serving the private interests of certain people (creditors), etc. Basically, it is true that CCC’s offer the debtors in trouble a relative relief from interest rates and/or fees, but that’s definitely not going to be the best solution that a debtor can get.

Some people think that consumer credit counseling agencies really do negotiate with the creditors to build up a certain debt repayment plan. However, in reality there’s hardly any negotiation involved – they just state the requirements imposed by the creditors who fund them and that’s all. Debt management groups look like a really good opposition to CCC’s – simply because they are for-profit organization aiming at building up fair and balanced debt management plans that their clients will find affordable.

Debtors often choose to stick to CCC’s, which do not charge any fees for their service, while for-profit debt management organizations usually prove to be more effective in building up affordable DMP’s. This is one of the numerous cases when a provider of a chargeable service proves to be caring about the customer much more than a company that provides a service, which seems to be the same, for free.

The debtors who use debt management plans usually have only their unsecured credit card accounts included into their DMP’s. As opposed to it, monthly payment reductions do not apply to secured debts (mortgages, car payments, rent and utilities, etc). There have been several cases when the representatives of the consumer credit counseling agencies told their clients they couldn’t include a credit card in the offered DMP due to the fact that the creditor doesn’t pay them for collecting on that debt.

The participation in a DMP is usually reflected in one’s credit history.