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Personal Finance Management Plan, What is a debt management plan?. A debt management plan, or DMP, is a tool that credit counsellor use to help consumers who are struggling to repay their debt obligations, says Gail Cunningham, chief spokeswoman for the National Foundation for Credit Counselling (NFCC).
If you’re deep in debt and having trouble paying back your obligations, it’s likely that you need to talk to a qualified credit counsellor. During the counselling session, the counsellor will review your income and living expenses and make recommendations for adjustments, says Cunningham.
The counsellor will also emphasize the importance of priority-paying: Living expenses — such as rent/mortgage, food, utilities, medicine and the like — come first; followed by secured debts, typically an auto-mobile payment; followed by unsecured debts, such as credit cards, medical bills and the like.
“And, if there isn’t enough money to service all obligations, you might decide that a DMP is right for you,” says Cunningham. With a DMP, the counsellor negotiates with the creditors for a lower monthly payment and a lowered interest rate and requests that late and over-limit fees are stopped or lowered.
By way of background, Cunningham says the average consumer who comes to an NFCC-member agency has five to six credit cards, thus the above concessions can add up to enough savings that the person can meet his or her living expenses in full while still addressing debt reduction.
According to Cunningham, debts on a DMP are typically unsecured obligations such as credit cards, medical debt and the like. “However, NFCC-member agency counsellors pride themselves on holistic counselling (and) thus are equipped to help consumers with resolution options for most situations,” she says.
One example is student loan debt, which Cunningham says would typically not be included on a DMP. A counsellor can, however, help a person find a repayment program that is right for their situation, which they then handle independently of the DMP.
Of course, you might wonder what effect, if any, credit counselling might have on your credit report and credit score. And the answer, according to Cunningham, is that the counselling has no impact, either positive or negative.
“However, if person elects to use a DMP, it’s up to the creditor as to how they want to report it,” she says. “They may report that the consumer is on a workout plan, but what is key to note is that folks who need a DMP likely already have a tarnished pay history.It’s not being on the DMP that dings their credit report; it’s their previous track record.”
According to Cunningham, most consumers who go on a DMP do so because they cannot pay even the minimum monthly payment on their debt obligations. “In the counselling session the counsellor negotiates a reasonable and manageable new monthly payment with each creditor, which when approved, becomes the acceptable monthly payment,” she says. “Therefore, with on-time payments, the account begins to be reported as current.”
And that, says Cunningham, is why graduates of the DMP may be able to buy a house or a car, provided other requirements are met – income and the like.
“They have often improved their credit to the level that they are now eligible to be extended credit,” she says.