Legal Definitions - debt-management plan (DMP)

A Debt-Management Plan (DMP) is a structured agreement designed to help individuals repay their unsecured debts, such as credit card balances or personal loans. It involves three main parties: the individual in debt (the debtor), a non-profit credit counseling agency, and the debtor's various creditors.

Under a DMP, the credit counseling agency works on behalf of the debtor to negotiate with creditors. The goal of these negotiations is typically to reduce monthly payment amounts, lower interest rates, or waive certain fees. Once an agreement is reached, the debtor makes a single, consolidated monthly payment to the credit counseling agency. The agency then distributes these funds to each creditor according to the agreed-upon terms.

The primary purpose of a DMP is to provide a manageable repayment schedule, helping debtors avoid bankruptcy, reduce financial stress, and regain control of their finances by systematically paying off their debts over time. These plans are overseen by regulatory bodies like the U.S. Federal Trade Commission, with individual states also having powers to regulate DMPs to protect consumers.

Here are some examples of how a Debt-Management Plan might be used:

• Example 1: Consolidating Multiple Credit Card Debts

  Sarah has accumulated $25,000 across four different credit cards, each with high interest rates, making her minimum payments barely cover the interest. She feels overwhelmed and is struggling to make progress on the principal. Sarah could enter a DMP. A credit counseling agency would negotiate with each of her four credit card companies to potentially lower her interest rates and monthly payments. Instead of paying four separate bills, she would make one affordable payment to the counseling agency, which then distributes the money to her creditors. This structured approach helps her pay down her debt more efficiently and avoid missing payments.

• Example 2: Addressing Debt After an Income Reduction

  Mark recently had his work hours significantly reduced, leading to a substantial drop in his income. He has a personal loan, a medical bill he put on a store credit card, and an an old utility bill that has gone to collections, all of which he is now struggling to pay on time. Mark could utilize a DMP to address his financial difficulties. A credit counseling firm would assess his situation and negotiate with the lender for his personal loan, the store credit card company, and the collection agency for the utility bill. The aim would be to establish a single, reduced monthly payment that Mark can afford, allowing him to systematically repay these diverse debts without defaulting, despite his reduced income.