What is a debt management program?
Defining a debt management program so you understand this vital solution.
Part of the challenge that comes with finding debt relief is understanding the solutions that are available to you. Most people don’t become familiar with a particular debt solution until they actually need to use it. This can create uncertainty when looking for a debt relief program, because you’re sailing into uncharted waters.
This page is designed to answer the question, “What is a Debt Management Program?” That way, you’re educated enough to decide if it’s the right solution for you. We’ll tell you exactly what it is and what it isn’t, so you can make informed decisions about your debt. If you still have questions, call to speak with a certified credit counselor at no charge.
Debt management program definition
A debt management program (DMP) is a form of assisted debt consolidation. It rolls multiple unsecured debts into a single monthly payment at the lowest interest rate possible. It restructures debt repayment to be as streamlined and efficient as possible. The result is that you can get out of debt faster, even though you may pay less money each month.
Debt management programs are administered by credit counseling agencies. The agency enrolls you in the program, negotiates with your creditors and distributes payments on your behalf. So you pay the agency one payment each month and they divide that payment amongst your creditors as agreed.
Other names for a debt management program
A “debt management program” also refers to a “debt management plan” – those two terms are interchangeable.
“Debt management program” is not exactly the same thing as “debt consolidation,” but it is one type of consolidation. There are other options for debt consolidation, such as a consolidation loan or credit card balance transfer.
The same is true of how “debt management program” relates to “credit counseling.” The administration of DMPs is just one part of what a credit counseling agency provides. It’s a piece of the service, but credit counseling extends beyond running programs for consumers. They also provide free and impartial debt and budget evaluations, as well as free financial education resources to consumers.
What a debt management program isn’t
It’s important to define what a debt management program is not, because that’s often more confusing than what it is. A “debt management program” is not the same thing as “debt settlement” or a “debt settlement program.”
A DMP is designed to pay back everything you borrow in a way that works for your budget. But you still pay back everything you owe. The only payment reduction comes with reduced interest charges. That’s why the monthly payments are lower and why you can get out of debt faster.
By contrast, a debt settlement program (DSP) is designed to settle your debts for less than the full amount owed. You pay back a certain percentage of what you borrowed and the creditor agrees to discharge the remaining balance. This usually causes a negative item in your credit report for each debt settled. That item stays on your credit for seven years from the date of discharge.
10 key facts that define a debt management program
- It’s a form of assisted debt consolidation
- It pays back everything you borrowed in a more efficient way
- As a result, when done correctly there is no credit damage – in some cases, clients build credit by completing the program successfully
- You go through a credit counseling agency to enroll in the program
- A DMP typically reduces your total payments by 30-50% due to redcuced interest rates
- Through creditor negotiation, interest rates are usually reduced to between 6% and 10% or in some cases eliminated entirely
- Clients typically complete the program successfully within 3-5 years (36-60 payments)
- You can include any type of unsecured debt, as long as the creditor agrees to have that debt included; this includes medical debt collections and payday loans
- You cannot include secured debts, such as auto loans and mortgage debt, or student loans in a debt management program
- State regulators set DMP structures; in most cases fees cap out at $69