16 May What is a Debt Management Plan? (Part 2)
A debt management plan is designed to pay off your debt by restructuring your payments over a fixed period of time. In the ‘before’ times (before the revisions to the Bankruptcy Code in 2005), it was possible to attempt such a payment plan with your creditors.
A DMP (debt management plan) can take several forms. If you have the ability, it is possible to pay off your accounts in full for less than what is owed by making a lump sum payment. This lump sum payment could have been as little as 25% of the total balance. More recently, lump sum payments need to be much larger, in many cases as much as 80% of the balance due.
More realistically, monthly payments are necessary to work out a reasonable plan. But how reasonable is it? In order to make the plan work, interest rates or balances need to be reduced otherwise the DMP is really no different than your regular monthly payments. A workable payment plan should last no longer than 3 years and all of your creditors should agree to the terms.
Think about this. All of your credit should agree to the terms. How often have you have any group of people agree 100% about anything? The creditors should agree to a reduction in the interest rate or the balance due. How likely is that? Again, if you could pay the regular monthly payments, ask how is a DMP helping you?
Your time is better spent learning how to budget your income and learning how to manage that budget. Interestingly, studies have shown that 97% of the people contemplating filing for bankruptcy are unable to afford the payments required for creditors. You can use the bankruptcy process to boost your ability to control your budget and plan for the future.