Debt Management Plans - Pros and Cons

Debt Management Plans (DMP's) are a way to freeze further interest payments and prevent additional charges accruing. Most importantly, they are a means of negotiating credit card debt payments in order to improve affordability. Rather than continuing to make a payment based on the existing terms of the credit agreement, payment will now depend upon the level of disposable income you have available.

Advantages of Debt Management Plans

Affordability. Negotiating credit card debt through an intermediary helps to reduce monthly payments and balance family finances.

Freeze interest payments and charges. Creditors may be prepared to freeze interest payments and further charges. This is essential if a debtor is to be able to pay down debt at a new, affordable and reduced rate.

Avoid filing for bankruptcy. Debt Management Plans provide an opportunity to clear debt through an alternative debt solution.

Collection agency activity. An agreement is likely to mean that debt collection agencies will no longer pursue you because they are now receiving a reduced payment.

Alleviates stress and anxiety. Negotiating credit card debt downwards and preventing further collection agency activity provides peace-of-mind.

Disadvantages of Debt Management Plans

Credit rating. Negotiating credit card debt will have negative ramifications for your FICO score. However, those who have already missed or made late payments will have already damaged their credit rating.

Time. As there isn't normally a debt write-off, it can take a number of years to clear debt. Filing for bankruptcy under chapter 7 could allow you to enjoy a debt-free life in just 4 to 6 months.

Charges. Debt Management Plans typically impose a charge of 10-15% for administering this debt solution. This is money that could have been used to pay down personal debt.

Secured debt. No secured debts can be included in a DMP. This is because creditors won't be agreeable as the collateral gives them greater collection powers.

A Debt Management Plan (DMP) can help if you are unable to maintain monthly payments on a credit agreement in its current format. Always consult a qualified debt counselor before proceeding with any debt solution. It is important to make the right selection from the outset.

Disclaimer: This article in no way attempts to provide legal, financial or tax advice. One should consult a licensed attorney, tax advisor, or other qualified financial professional before proceeding.