Debt management plans (DMPs) are one of the solutions which are available to people who are in financial difficulties due to large amounts of personal indebtedness. Often the money may be owed to creditors charging high interest rates, such as money withdrawn from credit card accounts. DMPs are not the only option. As well as consolidating debt with a debt management plan, those in financial difficulties may wish to consider loan consolidation, or debt settlement (or negotiation). In the worst cases bankruptcy may be the only viable option. Individual Voluntary Arrangements (IVAs) are an alternative to bankruptcy which are available in the UK.
Those who are in financial difficulty may be confused about the alternatives, and may also be anxious and worried about demand letters which they may be receiving from their creditors. It is normally a good idea to fully review the options with the help of a credit counselor. In the UK this role is performed both by commercial firms, and by charitable organizations. CCCS (Consumer Credit Counseling Service) and CAB (Citizens Advice Bureau) are two of the largest charities working in this field. Companies will charge their clients a fee, and clients should make sure they understand the fees before signing up to any plan.
In the US there are also non-profit and commercial organizations offering credit counseling. Not all commercial firms are bad, but some are, and the FTC have received numerous complaints. It is wise to follow advice, such as the FTC’s “Knee Deep In Debt” guideline, when choosing a credit counselor.
Normally the first action which should be taken by the credit counselor, is a review of the client’s financial circumstances. As everyone will have different problems, the best solution will differ from client to client.
As an example of this, home owners may have different options to those in rented accommodation. Consolidating unsecured debts into a secured, lower interest loan may be the right solution for some people, although they should be made aware that this puts their home at risk if they still cannot keep up payments.
Those who live in rented homes do not have that particular option, but they may have less to lose from some of the other options, such as taking the IVA route (an alternative to bankruptcy, available in the UK).
Once the individual’s financial situation has been properly assessed, then the credit counselor will normally offer a recommendation of the best way forward for that person. A debt management plan, or DMP, is one option.
When the plan is being set up, the client and the counselor need to work together, to produce a realistic household budget. Monthly income and outgoings must be identified. Necessary spending (food, rent, electricity) must be kept apart from unnecessary (e. G. Meals out, cigarettes, alcohol). Some debts are normally identified as being priority debts, for example tax and mortgage arrears.
After all necessary spending and priority debt repayment has been calculated, then any remaining monthly income is allocated to the DMP. The client is normally expected to make a single monthly payment into the DMP, which is administered by the credit counseling organization. Moneys in the DMP are usually allocated in a fair (pro-rata) way among the creditors. Most often creditors will take a fair and reasonable attitude towards debtors who make a genuine effort to repay through a DMP. Interest charges and other penalties are often frozen by creditors, although they may have no legal obligation to do so.