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{{Personal finance}} |
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{{Unreferenced|date=December 2006}} |
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'''Debt management plan''' ('''DMP''') is an agreement between a [[debtor]] and a [[creditor]] that addresses the terms of an outstanding [[debt]].<ref name=FTC>{{cite web|last1=FTC (Federal Trade Commission)|title=For People on Debt Management Plans: A Must-Do List|url=https://www.consumer.ftc.gov/articles/pdf-0045-debt-management-plans.pdf|website=FTC.GOV|publisher=Federal Trade Commission (United States Government)|access-date=30 December 2014|archive-date=20 September 2017|archive-url=https://web.archive.org/web/20170920103347/https://www.consumer.ftc.gov/articles/pdf-0045-debt-management-plans.pdf|url-status=dead}}</ref> This commonly refers to a personal finance process of individuals addressing high [[consumer debt]]. Debt management plans help reduce outstanding, [[unsecured debt]]s over time to help the debtor regain control of finances. The process can secure a lower overall [[interest rate]], longer repayment terms, or an overall reduction in the debt itself.<ref name="Ryan2011">{{cite book|author=Joan Ryan|title=Personal Financial Literacy|url=https://books.google.com/books?id=zdWrPiSGXY4C&pg=PA292|access-date=13 December 2011|date=14 January 2011|publisher=Cengage Learning|isbn=978-0-8400-5829-4|pages=292–}}</ref> |
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==Overview== |
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A '''Debt Management Plan''' (DMP) is a method used in the United States and elsewhere for paying personal debts (which typically have gotten out of control in the sense of payments due taking too large a portion of income, or even exceeding it) that involves cataloguing all the debts, assessing income and budget, and re-negotiating interest rates and payments with the lenders, based upon evidence that the result will be a higher liklihood of collection by the lenders. The simplest form of such a plan is done by creating a budget for paying debts, and then paying all the minimum payments on time from the fund created by the budget, using all extra funds each month to make pre-payments on the highest-interest debt first (assuming no pre-payment penalty exists), not taking on new debt until all the debt is paid. In cases where the budgeted debt payment is lower than the minimum payments due, payments may have to be re-negotiated with the lenders. Such a plan is considered a good alternative to bankruptcy because it results in more creditors being paid, and in the debtor's credit ratings and self-esteem remaining intact. In the 1990s and early 2000s debt-management agencies became more and more organized and created debt management plan standards. In the typical scenario, the debt management agency helps the debtor develop a debt-payment budget, and then uses long-standing relationships with the most popular lenders to re-negotiate lower interest rates and payments. Part of the benefit of such a plan is that these relationships, and the overall organization that such plans provide, convince lenders that they will have a better chance of collecting money owed (and ultimately increase profits). The plan is usually marked on the credit ratings, lenders close accounts and do not allow further borrowing while the plan is in place; however, once the debts are paid the credit ratings do not drop very much; and in some cases can emerge higher than before due to the payment history. These agencies typically collect one monthly payment from the debtor, and pay all the bills, in exchange for a flat monthly fee, releiving many debtors of the extra complications of managing multiple payments and due dates. Even with the fee, many debtors in these programs save large amounts of money on interst and pay off their debts much more quickly than they would have paying the original minimum payments. An association that organizes many of these debt management agencies and educates the public is called Care One Credit(www.careonecredit.com). |
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{{more|consumer debt}} |
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DMPs for consumers are often negotiated by a [[credit counseling]] agency on behalf of the debtor.<ref name=FTC /> Credit counseling agencies often address the debt by working with the debtor to set a budget based on their regular [[Personal income|income]] and [[Consumer spending|expenditures]] that will then include one regular bill payment that is allocated across the creditor(s). Agencies will negotiate on behalf of the debtor to lower payments and interest rates with creditors. Some of the agencies are non-profits that charge no or non-fee rates, while others can be for-profit and include high fees.<ref name=FTC /> The effect on the debtor's overall [[credit score]] will vary.<ref name=CreditScore>{{cite news|last1=Sandberg|first1=Erica|title=Will a Debt Management Plan Hurt Your Credit Score?|url=http://www.foxbusiness.com/personal-finance/2013/07/31/will-debt-management-plan-hurt-your-credit-score/|access-date=30 December 2014|work=Fox Business News|agency=Fox News|date=August 9, 2013}}</ref> In the United Kingdom, as well as DMPs, residents can also apply for an [[Individual voluntary arrangement]] (IVAs), which can give the debtor a discount on their debt.<ref name=UKDebt>{{cite news|last1=Evans|first1=Judith|title=UK debt management company Harrington Brooks to pay compensation|url=http://www.ft.com/cms/s/0/0a2643dc-86bb-11e4-8a51-00144feabdc0.html#axzz3NPXCyN7V|access-date=30 December 2014|work=FT.COM Financials|date=December 18, 2014}}</ref> |
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==Regulations== |
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===United States=== |
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In the United States, credit counseling agencies are loosely regulated by the [[Federal Trade Commission]] (FTC), the nation's [[consumer protection]] agency, which can [[Lawsuit|sue]] companies that have deceived consumers about the cost, nature, or benefits of their services.<ref name="FTC" /> Different states may regulate DMPs individually and [[State attorney general|attorneys general]] are empowered to protect state citizens from fraud.<ref name="NYBar">{{cite web |author=CIVIL COURT COMMITTEE CONSUMER AFFAIRS COMMITTEE ([[New York State Bar Association]]) |title=PROFITEERING FROM FINANCIAL DISTRESS: AN EXAMINATION OF THE DEBT SETTLEMENT INDUSTRY |url=http://www2.nycbar.org/pdf/report/uploads/DebtSettlementWhitePaperCivilCtConsumerAffairsReportFINAL5.11.12.pdf |access-date=30 December 2014 |date=May 2012}}</ref> |
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A '''Debt Management Plan''' (DMP) is an informal debt repayment arrangement, available in the [[United Kingdom]], between a [[debtor]] and their [[creditors]]. |
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===United Kingdom=== |
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Debt Management Plans can be proposed by the debtor themselves or by a third party debt management organisation such as [[CCCS]] or [[Payplan]] [http://www.payplan.co.uk]. Essentially, Debt Management Plans are supposed to represent a 'trade off' between the debtor and their creditors with respect of an acknowledged outstanding debt that cannot be paid within the contractual agreements signed by the debtor originally. |
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In the United Kingdom, the [[Financial Conduct Authority]] is responsible for the regulation of consumer credit and has established a Debt Management Plan Protocol. It can impose fines for improper conduct.<ref name=UKDebt /> |
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For many people in the UK a Debt Management Plan is seen to be a way in which they can offer to repay what is owed to their creditors at a repayment rate that reflects the realistic affordability of the debtor. |
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===European Union=== |
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However, as creditors are under no obligation to accept or agree to the terms offered by a debtor or their debt management representative many DMPs do not actually achieve debt resolution for the debtor. This is largely due to the fact that the balance of power lies completely with creditors when deciding whether to reduce interest charges or late payment fees. The debtor and their representatives have no power to influence the decision of the creditors and this ultimately results in many debtors facing higher debt levels upon entering a DMP due to interest and late payments fees continuing to accrue. |
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Elsewhere in the European Union, regulation and non-regulation of credit counseling agencies and their approaches, including DMPs, are widely varied. In [[Sweden]], guidelines for credit counseling are loosely provided by the [[Swedish Confederation of Professional Employees]] (TCO) and creditors are encouraged to use them in lieu of the court system. In [[Ireland]], the [[Irish Congress of Trade Unions]] (ICTU) provides debt resolution information directly to debtors. In [[Latvia]], a debt advisory company called LAKRA works with employers to assist indebted employees.<ref name=Eurofound>{{cite web|last1=DuBois|first1=Hans|title=Household debt advisory services in the European Union|url=http://eurofound.europa.eu/sites/default/files/ef_files/pubdocs/2011/89/en/1/EF1189EN.pdf|publisher=[[European Foundation for the Improvement of Living and Working Conditions|EUROFOUND]]|access-date=30 December 2014|date=August 11, 2011}}</ref> |
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In the UK many debt advisors are now promoting the [[Individual Voluntary Arrangement]] (IVA) as a better alternative to both Debt Management Plans and [[bankruptcy]] as IVAs offer debtors a legally binding agreement with their creditors. |
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==See also== |
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* [[Debt consolidation]] |
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* [[Debt counseling]] |
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* [[Debtors Anonymous]] |
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* [[Debt-snowball method]] |
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* [[Bankruptcy]] |
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==References== |
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{{Reflist|30em}} |
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{{Debt}} |
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[[Category:Debt|Management plant]] |
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[[Category:Personal finance]] |
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Latest revision as of 05:33, 5 June 2024
Debt management plan (DMP) is an agreement between a debtor and a creditor that addresses the terms of an outstanding debt.[1] This commonly refers to a personal finance process of individuals addressing high consumer debt. Debt management plans help reduce outstanding, unsecured debts over time to help the debtor regain control of finances. The process can secure a lower overall interest rate, longer repayment terms, or an overall reduction in the debt itself.[2]
Overview
[edit]DMPs for consumers are often negotiated by a credit counseling agency on behalf of the debtor.[1] Credit counseling agencies often address the debt by working with the debtor to set a budget based on their regular income and expenditures that will then include one regular bill payment that is allocated across the creditor(s). Agencies will negotiate on behalf of the debtor to lower payments and interest rates with creditors. Some of the agencies are non-profits that charge no or non-fee rates, while others can be for-profit and include high fees.[1] The effect on the debtor's overall credit score will vary.[3] In the United Kingdom, as well as DMPs, residents can also apply for an Individual voluntary arrangement (IVAs), which can give the debtor a discount on their debt.[4]
Regulations
[edit]United States
[edit]In the United States, credit counseling agencies are loosely regulated by the Federal Trade Commission (FTC), the nation's consumer protection agency, which can sue companies that have deceived consumers about the cost, nature, or benefits of their services.[1] Different states may regulate DMPs individually and attorneys general are empowered to protect state citizens from fraud.[5]
United Kingdom
[edit]In the United Kingdom, the Financial Conduct Authority is responsible for the regulation of consumer credit and has established a Debt Management Plan Protocol. It can impose fines for improper conduct.[4]
European Union
[edit]Elsewhere in the European Union, regulation and non-regulation of credit counseling agencies and their approaches, including DMPs, are widely varied. In Sweden, guidelines for credit counseling are loosely provided by the Swedish Confederation of Professional Employees (TCO) and creditors are encouraged to use them in lieu of the court system. In Ireland, the Irish Congress of Trade Unions (ICTU) provides debt resolution information directly to debtors. In Latvia, a debt advisory company called LAKRA works with employers to assist indebted employees.[6]
See also
[edit]References
[edit]- ^ a b c d FTC (Federal Trade Commission). "For People on Debt Management Plans: A Must-Do List" (PDF). FTC.GOV. Federal Trade Commission (United States Government). Archived from the original (PDF) on 20 September 2017. Retrieved 30 December 2014.
- ^ Joan Ryan (14 January 2011). Personal Financial Literacy. Cengage Learning. pp. 292–. ISBN 978-0-8400-5829-4. Retrieved 13 December 2011.
- ^ Sandberg, Erica (August 9, 2013). "Will a Debt Management Plan Hurt Your Credit Score?". Fox Business News. Fox News. Retrieved 30 December 2014.
- ^ a b Evans, Judith (December 18, 2014). "UK debt management company Harrington Brooks to pay compensation". FT.COM Financials. Retrieved 30 December 2014.
- ^ CIVIL COURT COMMITTEE CONSUMER AFFAIRS COMMITTEE (New York State Bar Association) (May 2012). "PROFITEERING FROM FINANCIAL DISTRESS: AN EXAMINATION OF THE DEBT SETTLEMENT INDUSTRY" (PDF). Retrieved 30 December 2014.
- ^ DuBois, Hans (August 11, 2011). "Household debt advisory services in the European Union" (PDF). EUROFOUND. Retrieved 30 December 2014.