In recent months I’ve had a few clients come to my office because of a failed Debt Management Plan (DMP) proposed by a credit counseling service. Basically, a DMP is what a debt consolidation provider will sell you if you respond to their TV or radio ad about how you can get out of debt without filing a bankruptcy. For anyone struggling with credit card debt, the offer of making one easy payment and getting creditors off your back can certainly be enticing.
So, what is a Debt Management Plan?
Usually a DMP is a simple agreement saying you will make a monthly payment to the debt consolidator for a 4 to 5 year period. In turn, the debt consolidator splits up your payment, first paying themselves and then your creditors. The DMP providers attract clients with plans that include reduced interest rates, fees and payments. Obviously, credit card companies are more than happy to work with DMP counselors knowing these plans insure many more years of payments on the exorbitant interest they have already charged.
So, do DMP’s work? I assume there are some successful completions of a DMP but as a bankruptcy attorney I see the failures. The sad thing about a DMP failure is the debtors have usually made dozens of payments and still find themselves in the same place as before with little to show for it. Most of the time this means they’ve spent a small fortune and have to file a bankruptcy anyway.
The problems with DMP’s are numerous. First off, the plans can’t deal with mortgages, car loans or student loans. The payment agreement is strict, and one missed payment will usually void the entire repayment plan. Even worse, your credit score will not start to rebound until after you have successfully completed the entire DMP. If you get sick, divorced, lose your job or even if your car breaks down you will very likely not be able to continue with the DMP as you are not allowed to miss a payment or get another loan. And remember, five years is a LONG time for your life to run perfectly without missing a payment.
And then there’s the reality that in many cases a DMP isn’t really a good deal when it comes to your pocketbook. A good debt consolidation example comes from Dave Ramsey on his website here:
Let’s say you have $30,000 in unsecured debt, including a two-year loan for $10,000 at 12%, and a four-year loan for $20,000 at 10%. Your monthly payment on the first loan is $517, and the payment on the second one is $583. That’s a total payment of $1,100 per month.
The debt consolidation company says they can lower your payment to $640 per month and your interest rate to 9% by negotiating with your creditors and rolling the loans together into one. Sounds great, doesn’t it? Who wouldn’t want to pay $460 less per month in payments?
But they don’t tell you that it will now take you six years to pay off the loan. This may not sound that bad until you realize how much more you will actually pay in additional payments. You will now pay $46,080 to pay off the new loan versus $40,392 for the original loans, even with the lower interest rate of 9%. This means you paid $5,688 more for the “lower payment.” Not such a good deal after all.
I agree. This is not a great deal for most folks struggling with debt.
On the other hand, a bankruptcy is often called a “fresh start.” It’s like ripping off the bandage quickly. Your pain is momentary as you unload most of your debt including any upside-down house or car payment. And although your credit score takes a hit when you file bankruptcy, you can immediately begin to rebuild your credit and get on with your life rather than wait the 4 or 5 years to complete a DMP.
For a few people debt consolidation and a Debt Management Plan are a good option. If that is your case we can point you to a non-profit debt consolidator that is actually able to protect your best interest rather than charge a fee for a service. However, if the math shows that you cannot repay your debts, we can usually solve that problem and get you a fresh start. After all, this is what the bankruptcy laws are for.
Dean Ryan is an experienced Garden City Bankruptcy Attorney
for Southwestern KS. For a free bankruptcy consultation
call 620-275-9614 during normal business hours.