Basics
A debt management plan, also referred to as a DMP, is a way for people in financial distress to pay off bills through one monthly payment. Consumers bring all their bills to the credit counselor who adds them up. A fee for the services is added to the total. While many credit-counseling agencies are nonprofit organizations, they still charge a fee for DMP services. The client then makes one payment to the credit-counseling firm that turns around and pays all the bills. Credit counselors advise creditors of the DMP arrangement and often can renegotiate interest rates and late fees as long as the client continues to pay on time. Consumers need to monitor the payments made by the credit counseling group and contact creditors to make sure they have approved the terms.
Expectations
According to the Federal Trade Commission (FTC), reputable credit counseling agencies combine debt management services with counseling and financial education to help clients avoid future money problems. The FTC regulates the credit counseling industry and serves as the consumer protection agency for the nation's financial health. Any organization that offers only debt management without additional budget and money management technique training should be avoided. In many states, the Secretary of State's office requires a license for credit counseling firms. Consumers should check with their state to make sure the debt management company they are considering is following state laws. All terms of the DMP should be provided in writing. The FTC recommends that consumers use credit counseling services they can visit in person, and avoid online DMP providers. Fees should never be required upfront, but are usually a percentage of the total bills the company pays for the consumer or a flat service fee payable as services are provided.
Considerations
Consumers need to stick to the payment schedule prepared by the credit counselor to maintain the terms that have been made with creditors. Late payments often can cause creditors to cancel fee waivers and bill the client for all past due amounts. A credit rating can be repaired over time as the consumer makes timely payments. Missing or late payments will adversely affect your credit score.
Consumers need to maintain vigilance and continue to receive monthly statements, even though the credit-counseling firm is making the payments. As soon as a consumer realizes payments have not been made according to the contract, he should call creditors and immediately cancel any automatic payments that were being made to the credit-counseling agency. When credit-counseling agencies go out of business or neglect to fulfill the terms of their agreement, the consumer must resume personally paying his bills.
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