Simply put, a debt management program (often referred to as a DMP, debt program, and sometimes a debt consolidation program) is an effective financial tool that can help you pay back the money that you owe in an efficient and timely manner. The main goal of a DMP is to make sure your creditors get paid while also helping you get back on track toward a better financial future.
How Does a Debt Management Program Work?
To enter a DMP, you’ll need to work with a credit counseling agency. The agency will assign you a credit counselor who will help guide you through the entire process, up until you’re finally debt free. To start the process you’ll sit down with your credit counselor and discuss all your current debts. Your counselor will create a debt repayment plan that you can afford based on your current income and your debt load. They’ll negotiate with your creditors, on your behalf, to lower your interest rates and potentially get certain fees waived.
Once your counselor has spoken to all your creditors and created a program that works for all parties, you’ll start making lump sum payments to your credit counseling agency. You’ll make one monthly payment to your counselor who will then distribute it to your creditors, according to the program that everyone agreed to. As part of your program, your creditors will hopefully agree to reduce or remove any further interest charges, this is where a DMP will help you save money and also pay back your debt quicker.
It’s important to note that any credit accounts included in your DMP will be frozen, meaning you won’t be able to use them. While this may be inconvenient, the main purpose of a DMP is to pay back off your debt, not accumulate more. Consider your frozen credit accounts as a great way to manage your spending habits and to learn how to live debt free.
Will a DMP Reduce The Amount I Owe?
Technically a DMP won’t reduce the total amount of debt you’re trying to consolidate, but it will:
- Make your debt more manageable by consolidating it into easy to handle monthly payments.
- Help prevent your debts from growing because of a reduced interest rate.
- Help you become debt free faster because more of your money will be going towards paying off the principle, not interest.
Keep in mind that if your debt load has become too much to handle and you simply cannot afford to pay it all back (even with the help of a DMP) you may want to consider debt settlement; a credit counselor will be able to help you with this option as well.
Will a DMP Hurt My Credit?
This is probably one of the most important issues to consider when deciding when debt relief option is best suited for your financial situation. Here’s how your credit will be affected once you enter a DMP:
- Unfortunately, the first payment you make to your counselor typically won’t be distributed on time, this is because you’re adjusting your payment schedule, and it will take a month to straighten out.
- This means that your creditors will report late payments for the first month of your DMP. Late payments do negatively affect your credit score and therefore your score will likely go down a few points.
- But, after the first month, your payments will be distributed on time according to your new payment schedule.
- Once you start making on-time payments your credit score will improve.
- Once your debt load starts to decrease your credit score will improve even more.
Credit improvement works slowly over time. If you work hard to always make your payments on time and don’t rack up any new debt, over time you will start to see your credit score grow.
Can I Consolidate all my Debts With a DMP?
Unfortunately no, not all types of debt can be consolidated with a debt management program. To help you determine if a DMP is your best option (based on the types of debt you’re looking to consolidate), we’ve listed out all the debt that can and cannot be consolidated with a DMP.
Debts That Can be Consolidated
- Credit card debt
- Unsecured debt (personal loans with no collateral)
- Credit card debt and unsecured debt from a credit union
- Apartment leases from an apartment you no longer live in
- Mortgage “short pay” balances
- Auto repossession
- Non-government student loan debt
- Cell phone and utility bills for services you no longer use
- Medical bills in collections
Debts That Cannot be Consolidated
- A mortgage for a home you’re currently living in
- A second or third mortgage
- A home equity line of credit
- Any type of credit or loan account from Sallie Mae
- Standard PayPal accounts
- Government student loans
- Court-ordered wage garnishments, judgments, alimony, or child support payments
- Fines, fee, and penalties for criminal activity
- Military star cards
- Cell phone or utility bills from your current service providers
- Any type of back taxes
- Gambling debt
- Bank overdraft fees
- A secured line of credit
- Any secured loans (loans that have collateral)
- Rent-to-own debt
- Timeshares
- Car repair bills
- Attorney fees
The Help You Need
Getting the help you need is often the most difficult step on your journey toward a debt free future; this is why choosing the best possible credit professional for your unique needs is so important. Rebound Finance is the leading debt and credit solution portal. Submit a request to speak with a debt specialist today.