Downsides of a DMP – Debt Management Plan Pros and Cons
A debt management plan and program is often a good option for people striving to become debt free. Debt management plans can help improve a difficult situation, but it is not always the only – or best solution. Understanding the downsides of a debt management plan makes it easier to determine if it is the best solution to personal debt problems.
The Risk of Fraud
Fraudulent and dishonest businesses are a risk related to any business and that includes debt management plans. While the Federal Trade Commission’s Telemarketing Sales Rule has strict advertising requirements, some fraudulent businesses will falsely advertise or exaggerate services their company does not provide.
Consumers should use caution and do research when looking for a legitimate program.
Taking time to look up reviews and look at the company’s status with the Better Business Bureau is one way to help ensure it will provide the results suggested before joining the program. Another way to help ensure the company is adhering to obligations is keeping up with debts and checking that all of the loans or credit cards are paid on time.
Payment Plans are Strict
While debt management plans are useful for getting out of debt, they may not offer the flexibility of other services, and the payment plans are very strict. This is primarily because it is not possible to negotiate and pay all of the debts, without paying the full amount each month.
For individuals with other resources who are struggling to manage their normal expenses, this rigid structure might not be an appropriate measure for credit relief. In some cases, debt consolidation or settlement programs might be a better method of managing the problem.
Though the debt management plan will usually help bring down the interest charges and balance, the company will require compensation and necessarily add fees to the account. The added fees are variable between companies and their policies however there are industry standards and regulation provided by the Federal Trade Commission. Fees should never be charged before the services begin and not until debts are actually settled. Companies that charge up-front charges upon starting the program are in violation of FTC TSR Rules.
Federal Trade Commission Telemarketing Sales Rule (TSR)
Rules Regulating the Debt Management and Relief Industry
The Federal Trade Commission revised and amended the Telemarketing Sales Rule (TSR) addressing the telemarketing of debt relief services. Consumers should be aware of these changes as these amendments define debt relief services, prohibit debt relief providers from collecting fees until after services have been provided, require specific disclosures of material information about offered debt relief services, prohibit specific misrepresentations about material aspects of debt relief services, and extend the TSR’s coverage to include inbound calls made to debt relief companies in response to general media advertisements. The amendments were revised to protect consumers from deceptive or abusive practices in the telemarketing of debt relief services.
Creditors Show Participation
Professional debt management programs will not report participation to the major credit bureaus although they will report participation and negotiate with the creditors. This can have an impact on credit scores, often bringing it down for a few months before the steady payments help improve the credit rating.
While this impact is not necessarily a consideration for every individual, it can cause problems for some men and women who join the program.
Interest on the Accounts
While the goal of any debt management plan is reducing interest charges to make the debts easier to manage, it is not possible to completely eliminate the interest. Interest is still charged on the accounts while individuals are in the program.
Though interest is still charged on the account, the negotiation from the debt management company can reduce interest and the balance significantly. This results in payments that are easier to manage. The amount the interest is reduced depends on the creditor, the consolidation negotiator, and the type of debt; but it can come down considerably in some cases.
Debt management and consolidation plans are one potential solution to complicated debt problems.
Though there may be some downsides to consider, the possibility of avoiding taking more debt for consolidation makes it an appropriate solution for some situations and individual preferences.