A Debt Management Plan (DMP) is a method used by various Debt
Management Services to facilitate repayment of personal unsecured
debts. This involves noting all the debts, assessing income and budget, and re-negotiating interest rates and payments with the creditors, resulting in a higher probability of successful collection by the creditord due to the debtors more realistic monthly repayment amounts.
DMPs are a managed informal arrangement with creditors - whether
the debtor uses a free creditor sponsored DMP organisation or
a fee-charging DMP company, accepting any terms of a DMP proposal
put forward on behalf of the debtor is accepted always at the
discretion of the creditors. A good debt
advice service recognises
this and will only suggest a debtor pays what they can realistically
afford after their priority costs (mortgage, utilities, food
etc) no matter what.
Fee-charging DMP companies will often charge up-front fees as
an 'admin' charge, and then will charge a percentage of the surplus
that is paid to the creditor as a fee to the debtor. The larger
the payment the debtor is encouraged to make, the larger the
fee the fee-charging DMP company receives. Also, there is the
possibility that a fee-charging DMP company will enter a debtor
into this kind of arrangement when it is not in the debtors interest
and bankruptcy might be a better alternative, especially if the
debtor has large debts and it would take them many years to pay
their debts back this way.
The fees charged by DMP companies are usually a percentage of
the monthly amount paid, money that could theoretically be going
to clear the debt itself if no fees were charged to the debtor.
However fee-charging companies usually employ dedicated "creditor
liaison" departments who can negotiate with creditors directly
in terms of stopping interest and other charges being added to
the debts in question.
People that use a debt management services to
eliminate 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 Debt Management
Plan, 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. Any Court action taken by the creditor is
also recorded on credit files.
RESOURCES: Debt Management Services
FTC Bureau
of Consumer Protection - Consumer Information: Credit & Loans
Credit Report
and Score Information from Experian.com
TransUnion
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and Securely
Equifax
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Protection
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Personal Finance
Money Tip: Reduce the number of creditors to as few as possible. With most people, a large part of their debt management problems arise because of the number of creditors they have to pay; the credit card company, store cards, utility bills, car loan payment, home loan payment, student loan payment, etc... |
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