What is a Debt Management Plan

As you no doubt know, this is a blog about personal finance with a leaning towards getting yourself out of debt, staying out of debt, and learning how to handle the money you make once you’re out of debt.  There are lots and lots of ways to get out of debt.  My personal favorite is pretty close to the Dave Ramsey “Total Money Makeover” method.  Not everyone is willing or able to go “gazelle intense” and bust their debt down to nothing the TTM way though.  For some, they’ve gotten so far down into that debt black hole that they just don’t know where to start.  Those people will, more often than not, end up at a bankruptcy hearing long before they’ll be exclaiming “I’m debt free!” on the radio.

But, if you’re one of those people, there’s one last stop on the debt freefall before you declare bankruptcy.  Call it a last ditch effort if you will.  That stop is a Debt Management Plan.  Too often, the DMP is associated with shysters posing as financial advisors who promise to get you out of debt, while loading you up with fees on the backend.  The problem with a DMP that charges fees is that you are actually adding on extra debt as you try and pay off your debt.  But, there are some reputable places that do offer a free debt management plan.  There are some that will help you to pay off your debt without going into further debt and without declaring bankruptcy.

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What exactly is a debt management plan?  The administrator of a DMP acts as your agent.  They contact all of your debtors, like credit cards, auto loan lenders, etc…  and negotiate a payoff schedule with a payment that you can afford.  Usually, that payoff schedule will include some pretty significant drops in the interest rate as well.  You make one large payment to the DMP agency, and they distribute the payments out to your debtors.  At the end of the DMP, you’ve paid off all of those accounts.  Any good DMP will require that you don’t add any new debt while on the plan.  It also will include at least a minimal amount of counseling to help you avoid getting back into debt when you’ve finished with the debt management plan.

A debt management plan isn’t perfect.  It’s not the ideal way to get rid of debt, but for some, who are having issues getting their debt under control, or, issues making all their payments, they can be a valid way to go about doing so without the pain of bankruptcy.  Your credit will still take a hit, however.  Not nearly the hit that a bankruptcy would deliver, but the accounts will get reported as being negotiated.

In the end, if your choice is between a debt management plan and bankruptcy, I’d take the DMP any day.