Debt management plan

A Debt Management Plan (DMP) is a method used in various countries for paying personal unsecured 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 likelihood of collection by the lenders.

A DMP is typically managed by a third party group. There are two types of DMPs. The first type is a fair disbursement of available funds from the debtor to their creditors based on a percentage of debt. For example, if a debtor has 100 monetary units available each month for debt repayment and Creditor A is 25% of his overall debt and creditor B is 75% of his overall debt then Creditor A would receive a fair and balance percentage of available fund. In this case Creditor A would receive 25 and Creditor B would receive 75. Typically the debtor pays the group managing this for them for their service.

The second type of DMP is typically run by consumer credit counselling service groups that are funded by creditors to collect and distribute money. In this model, repayment plans are developed by creditors telling the groups what the creditor requirement is and rewarding the group by paying them a percentage of funds collected from debtors and sent to creditors.

Using the example above, even if Creditor A had 25% of the overall debt but demanded 33% of the overall debt and compensated the credit counseling group more than Creditor B did for money recovered from the debtor, there is a very good chance that the clients money would be distributed at 33 to Creditor A and 67 to Creditor B.

Since creditors are the ones that dictate what payment they want, this approach is unfair and unbalanced to the consumer and treats creditors that pay credit counseling groups for collection services with preference.

In the United States the Internal Revenue Service (IRS), the regulator of charities, has raised grave concerns about the validity of the charitable status of credit counseling agencies. The IRS states "Although many credit counseling organizations provide valuable services to persons who find themselves in debt, the IRS is concerned that some have used their tax-exempt status to circumvent consumer protection laws and take advantage of those who are already in financial distress."

The IRS also made it clear that funding to credit counseling groups is nothing more than paid debt collection. Typically a credit counseling group calls these payments 'Fair Share' payments instead of debt collection compensation. The IRS stated , "Fair share payments are payments made by some credit card companies to credit counseling organizations based on the amount the organization collects from the consumer."

One of the concerns raised is that credit counseling groups that are paid for services by creditors is in fact nothing more than debt collector masquerading as a charity since they provide a commercial service, debt collection, to creditors for revenue and income. It would be hard to find a charitable purpose and mission in that activity.

The IRS also stated "The examinations completed thus far have uncovered abuses involving organizations that: fail to provide education; operate as commercial businesses; and serve the private interests of directors, officers, and related entities." It is true that in a DMP with a credit counseling group that a debtor may be able to gain some relief from interest rates or fees but that is granted solely at the discretion of the creditor.

There is an incorrect perception that these credit counseling groups that are funded by creditors for debt collection services actually 'negotiate' with the creditors to put together a repayment plan. There is in fact no negotiation involved. However, debt management groups that are not funded by creditors are much more likely to put together fair and balanced plans since they are not under the same compensation control as the credit counseling groups are.

Consumers often make a choice or determine the quality of the debt management group by looking to see if they charge the debtor a fee. Generally those that do charge a fee are thought to be taking advantage of the debtor. Consumers have no idea that in fact it is the other way around. Credit counseling groups that are compensated by the creditor are much more likely to acquiesce to the wishes and demands of the funding creditors and not treat debtor and their creditors fairly or repay debt in a balanced manner.

People that use a DMP to eliminate their debt will typically only have credit cards included in these DMPs. Secured debts, like mortgage car payment, rent and utilities, are not subject to monthly payment reductions. Unsecured debts like credit cards comprise the bulk of debt included. Credit counseling groups that are paid by creditors for debt collection services have been know to tell debtors that the debtor can't include a credit card in the DMP because the creditor does not pay the credit counseling group money for collecting on that debt.

When someone participates in a DMP it is usually marked on the credit ratings.