Debt Managemant Plan:
A Debt Management Plan (DMP) is a method
for 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 likelihood 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,
relieving 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
interest and pay off their debts much more
quickly than they would have paying the original
minimum payments.
Debt Management Plans can be proposed by the
debtor themselves or by a third party debt
management organisation. 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.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.
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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