What is a debt management plan (DMP)?

A debt management plan (DMP) is a structured repayment plan specifically designed to assist individuals in paying off unsecured debts, such as credit card balances, medical bills, and personal loans. The primary goal of a DMP is to create a manageable payment schedule that ultimately leads to debt elimination while potentially reducing interest rates and eliminating late fees through negotiations with creditors.

The effectiveness of a DMP lies in its structured nature, which helps individuals organize their finances and focus on paying off debts in a specified time frame, typically three to five years. This plan is typically set up by a credit counseling agency that works with both the debtor and creditors to create a plan that meets the needs of both parties.

In contrast, a legal agreement to eliminate all debts immediately would not accurately describe a DMP, as it acknowledges the reality that debts must be repaid over time. Additionally, while a financial strategy to increase income through investments is important for overall financial health, it does not directly address the repayment of existing debts. Similarly, while consolidating debts into a single payment can be a feature of some debt management strategies, a DMP specifically emphasizes structured repayment rather than merely consolidating debt.