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Debt Management Plans

Last updated 25th Nov 2022

The ability to manage debt is extremely important to the financial wellbeing of any household. If mismanaged, bills can quickly increase; reaching a point where making payments become difficult or nearly impossible.

Debt Management

In this article, we're going to discuss self-help plans and programs, as well as professional services. This includes a brief discussion of the growing debt problem in America, in addition to the components of a good debt management plan, or DMP.

There is a growing awareness that financial problems may have more to do with individual behavior patterns than how much money is in a weekly paycheck. Difficulties managing debt is not unique to lower income families; it affects individuals with six figure incomes as well. For some people, the more money they earn, the more they spend. That old saying really is true: What's important is not how much money someone makes, but how much they save.

Credit Card Balances

Anyone that has problems managing their money is just like millions of other Americans. The latest debt statistics published by the Federal Reserve (August 2020) indicate Americans now carry $985 billion in revolving credit card debt. They also charge roughly $2.2 trillion to their cards each year.

Self Help

It's important to determine the root cause of any problem. Did a family lose a source of household income? Or is someone merely living beyond their means? If the problem is caused by a change in someone's behavior, a social worker may be able to help. If overspending is a problem, then a budget may be the answer.

Whatever the cause, it's important to figure out how much money is owed creditors. The easiest way to do this is by examining credit card statements and other invoices (bills) with an outstanding balance. Then taking out a calculator, or opening up a spreadsheet, and start adding the numbers.

debt management
The next step is to determine which balance to pay off first. One tactic is to start with some of the smaller balances, since they're easier to eliminate. Once these cards no longer have a balance on them, it's time to put them away. Continue making minimum payments to the remaining creditors, and scale back on spending.

Credit Reports

Once some of the smaller balances are paid off, obtain a copy of a credit report and look for errors. These should be easy to identify, and if errors are found, they need to be corrected. This can be done by contacting the merchant or retailer directly or working with the credit bureau supplying the report. Once all the errors have been eliminated, pull out the cards with zero balances and close out the accounts.

At this point, outstanding balances should be limited to just a couple creditors. Now it's time to get serious about managing the home's finances by creating a plan; just like a business. There are many ways to put a budget together; including advice appearing in our article: Household Budget Basics. Another suggestion is to purchase personal finance software such as Intuit's Quicken.

Software programs will allow the end user to create a household budget and then track income and expenses. It's possible to create a budget by looking at old utility bills and credit card statements. Once created, progress can be monitored by looking at monthly variance reports; which provide insights into actual costs versus forecasted expenses.

Professional Debt / Credit Counselors

If someone cannot set up a realistic budget on their own, they need to find someone that can help walk them through the process. If the home financial challenges were the result of a change in behaviors, a credit counselor can help locate a social worker. They also provide assistance with household budgeting. We have more information on this topic, including how to find a reputable counselor in our article: Debt Counseling.

Professionals can also help put together a debt management plan, or DMP. The goal of these plans is to provide the client with a realistic schedule to pay down the outstanding balance on all of their accounts.

Debt Management Programs

Georgetown University's Credit Research Center conducted a study of the effectiveness of credit counseling. That study included ten agencies that emphasized financial education, which is an extremely important component of a good debt management program. Findings of that study include:

  • Delinquent borrowers benefit from early assistance, including engaging credit counseling agencies that focus on why the client is in financial distress and how to improve their financial condition.
  • Telephone and face-to-face delivery of the initial credit counseling sessions appear to generate equivalent outcomes for consumers in terms of creditworthiness measures taken two years later.
  • The creditworthiness of consumers who participated in debt management programs actually improved.

This last point is important because the research found that consumers who were recommended for a DMP by credit counselors and chose to start payments, had a significantly lower incidence of bankruptcy. These same consumers improved their delinquency risk scores relative to those who were recommended for a DMP and decided not to start their plans.

Developing a Plan

The intention of these plans is to satisfy three parties:

  • Debtor: the plan needs to address the realities of the person's financial resources. That is, it's important to provide them with a plan they can meet.
  • Creditors / Lenders: everyone owed money needs to be assured they are receiving the maximum amounts possible.
  • Credit Counselor: through a "fair share" compensation arrangement with creditors, counselors need to feel confident the plan will work for both the lenders and debtor.

The process the credit counselor will go through includes a review of the household's sources of income as well as expenses. From this information they can develop a good debt management plan.

DMP Example

Ultimately, a good plan needs to balance the needs of lenders and those responsible for repaying the money owed. The plans themselves are structured to allow debt to be paid back as quickly as possible, while still keeping payments at realistic (affordable) levels. The following tables illustrate how that plan might look as well as the savings achieved:


CreditorDebt OwedInterest RateMonthly PaymentDMP Interest RateDMP PaymentCompany A$1,50018%$31.5318%$31.53Company B$2,00019%$43.2210%$40.00Company C$3,00022%$70.280%$42.49Totals$6,500 $145.03 $124.02


Standard PaymentsDMP PaymentsSavingsRepayment Time84 months60 months24 monthsAmount Repaid$12,182.52$7,441.20$4,741.32

This example illustrates the value of a well-structured plan. In this case, there are savings both in terms of time and dollars.

DMPs and Credit Reports

Participation alone in a debt management plan cannot ruin a person's credit report. In fact, the research indicates that DMPs can actually have a positive effect.

Creditors may report payments as "reduced" or there may be a notice on the report indicating "payments administered by credit counseling agency." If the report already shows a pattern of late or missing payments, the DMP will have a positive effect by recording a consistent repayment pattern. If someone has a relatively clean report to begin with, a DMP can have a negative impact in the short-term.

About the Author - Debt Management

Moneyzine Editor

Moneyzine Editor