What is a Debt Management Plan?
A Debt Management Plan, also called a Debt Management Program, is a negotiated settlement among you, your credit counselor, and all of your creditors.
In a typical Debt Management Plan, your credit counselor will help you make a budget to determine what you can afford to pay each month, and then negotiate a payment plan with your creditors.
How do I start a Debt Management Plan?
Your credit counselor sends a proposal letter to each of your creditors, requesting that they accept your Debt Management Plan.
Each creditor is provided with the following information:
- Your personal information, including your name, address, net income, living expenses, and total debt.
- The reason that you are filing the Debt Management Plan.
- A list of each creditor, with the amount owed.
- Creditor specific information, such as your account number.
- The proposed repayment amount for each creditor, and when the creditors can expect payment.
How long will my Debt Management Plan take to complete?
A typical Debt Management Plan takes approximately 36-60 months, or about three to five years, depending on the amount of your monthly payment. If your income increases during the plan, you may be able to repay it sooner by increasing your monthly payment.
How much will it cost?
Most credit counselors are non-profit organizations, so the costs for their services are usually very minimal, averaging only a few dollars per month. Most credit counseling services are funded from a variety of other sources, including foundation donations, sale of education services, and contributions or donations from creditors.
Must all of my creditors be included?
Debt Management Plans are successful because the creditors know that they will be treated fairly and equitably. In most cases, all unsecured debts that you owe must be included in the Debt Management Plan.
What if a creditor does not accept the Debt Management Plan?
Most creditors are happy to accept a Debt Management Plan, because they know that they will be receiving all of their money, with no further work required by them. In the event that one of your creditors is unwilling to accept the proposed Debt Management Plan, it may be possible to make changes to your monthly budget to free up cash to service the requirements of that creditor separately from the plan.
If creditors do not accept the plan, bankruptcy under Chapter 13 is the next most logical solution.
What can I do to ensure success in my Debt Management Plan?
The success of credit counseling, and your Debt Management Plan, is largely dependent on you. Here are some tips to make sure you complete your Debt Management Plan on schedule:
- Most importantly, make your payments on time. Most credit counseling services will set you up on a pre-authorized payment plan so that the payment comes out of your bank account at a set time each month. It is essential that funds be in your bank account on the required date.
- Closely monitor your statements from creditors. You may continue to receive monthly creditors’ statements. You are responsible to monitor these statements to ensure that your creditors have reduced the interest rates or stopped the late fees (if that’s what they agreed to), and that the payments from your credit counselor are being properly applied. You should keep copies of all statements, so that if there are problems in the future you have proof of payment.
- If problems occur, contact your credit counselor immediately. Your credit counselor is there to help, so if you don’t understand something, or if you anticipate problems with your payments, contact them immediately. If your phone number, address, or email address changes, notify your credit counselor immediately.
- Make no direct payments directly to your creditors, unless you have the approval of your credit counselor. The point of the Debt Management Plan is to have your credit counselor work with you to deal with your debts, not for you to deal with them directly.
- Do not apply for additional credit during your Debt Management Plan, unless you have the prior approval of your credit counselor. Your Debt Management Plan is designed to get you out of debt, so applying for more credit during your DMP may invalidate your plan, and allow your creditors to resume their regular collection activities or reinstate regular interest rates and fees.