Debt management plan
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A Debt Management Plan (DMP) is a method used in the United States and elsewhere for paying personal debts (which typically have gotten 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. The simplest form of such a plan is done by creating a budget for paying debts, and then paying all the minimum payments on time from the fund created by the budget, using all extra funds each month to make pre-payments on the highest-interest debt first (assuming no pre-payment penalty exists), not taking on new debt until all the debt is paid. In cases where the budgeted debt payment is lower than the minimum payments due, payments may have to be re-negotiated with the lenders. Such a plan is considered a good alternative to bankruptcy because it results in more creditors being paid, and in the debtor's credit ratings and self-esteem remaining intact. In the 1990s and early 2000s debt-management agencies became more and more organized and created debt management plan standards. In the typical scenario, the debt management agency helps the debtor develop a debt-payment budget, and then uses long-standing relationships with the most popular lenders to re-negotiate lower interest rates and payments. Part of the benefit of such a plan is that these relationships, and the overall organization that such plans provide, convince lenders that they will have a better chance of collecting money owed (and ultimately increase profits). The plan is usually marked on the credit ratings, lenders close accounts and do not allow further borrowing while the plan is in place; however, once the debts are paid the credit ratings do not drop very much; and in some cases can emerge higher than before due to the payment history. These agencies typically collect one monthly payment from the debtor, and pay all the bills, in exchange for a flat monthly fee, relieving many debtors of the extra complications of managing multiple payments and due dates. Even with the fee, many debtors in these programs save large amounts of money on interest and pay off their debts much more quickly than they would have paying the original minimum payments.
A Debt Management Plan (DMP) is an informal debt repayment arrangement, available in the United Kingdom, between a debtor and their creditors.
Debt Management Plans can be proposed by the debtor themselves or by a third party debt management organisation such as CCCS or Payplan [1]. Essentially, Debt Management Plans are supposed to represent a 'trade off' between the debtor and their creditors with respect of an acknowledged outstanding debt that cannot be paid within the contractual agreements signed by the debtor originally.
For many people in the UK a Debt Management Plan is seen to be a way in which they can offer to repay what is owed to their creditors at a repayment rate that reflects the realistic affordability of the debtor.
However, as creditors are under no obligation to accept or agree to the terms offered by a debtor or their debt management representative many DMPs do not actually achieve debt resolution for the debtor. This is largely due to the fact that the balance of power lies completely with creditors when deciding whether to reduce interest charges or late payment fees. The debtor and their representatives have no power to influence the decision of the creditors and this ultimately results in many debtors facing higher debt levels upon entering a DMP due to interest and late payments fees continuing to accrue.
In the UK many debt advisors are now promoting the Individual Voluntary Arrangement (IVA) as a better alternative to both Debt Management Plans and bankruptcy as IVAs offer debtors a legally binding agreement with their creditors.
