Debt Management

A Debt Management Plan (DMP) is a method used in various countries for paying personal unsecured debts that involves noting all the debts, assessing income and budget, and re-negotiating interest rates and payments with the lenders, based upon confirmation that the result will be a higher likelihood of collection by the lenders due to the debtors more realistic monthly repayment. DMPs managed informal arrangement with creditors whether the debtor uses a free creditor sponsored DMP organisation or a fee-charging DMP company. A good debt advice service recognises this and will only advice a debtor pays what they can realistically afford after their priority costs (mortgage, utilities, food etc) no matter what. It is likely that creditors will want to review the debtor's situation annually to ensure they are paying as much as they can reasonably afford. People that use a DMP to eliminate their debt will typically only have unsecured debts such as personal loans, credit cards, bank overdrafts and store cards included in their plan. Secured debts or priority costs, like mortgages, car HP repayments, rent and utilities, are not subject to monthly payment reductions. When someone participates in a DMP the likelihood that their credit rating will be damaged already is very high. It is not the DMP that affects the credit rating directly, but the inability of the debtor to meet their contractual payments that will be recorded on their credit file - usually in the form of a default notice.

The creditors will close the customer's accounts and restrict the accounts to future charges. The main benefit of a DMP as advertised by most agencies is the combination of multiple monthly payments into one monthly payment, which is usually less than the sum of the individual payments previously paid by the customer. This is because credit cards banks will usually accept a lower monthly payment from a customer in a DMP than if the customer were paying the account on their own. The reduction in interest allows the counseling agencies to advertise that their customers will be debt free in periods of 3-6 years, rather than the 20+ years that it would take to pay off a large amount of debt at high interest rates. A third benefit offered by credit counseling agencies is the process of bringing delinquent accounts current. This is often called reaging an account. This usually occurs after making a series of on-time payments through the debt management program as a show of good faith and commitment to completion of the program. The monthly payment due on the statements would be the monthly payment negotiated by the DMP, and the account report as current to the credit bureaus. It should be noted that this process does not eliminate the prior delinquencies from the credit bureau reports. It merely gives a fresh start and an opportunity for the client to begin building a positive credit history. Like all derogatory credit information, the passage of time will lessen the impact of the negative marks when credit scores are calculated.

Their stated objective was to promote financial literacy and help consumers avoid bankruptcy, but they did not serve as collection agencies for the creditors. The first local credit counseling franchises emerged in the 1960s, offering education and counseling directly to consumers.


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