A Debt Management Plan (DMP) is neither credit counseling nor debt consolidation. It is a plan in which your creditors agree (in advance) to special terms. In some cases, your creditors may agree to accept less than full payment in return for settling your accounts.  In other cases, your creditors may agree to extend payment terms or grant otherwise more generous provisions to help you pay back the debt. You are then asked to close all of your accounts. You send payments to the DMP, which pays off your creditors. When you’re through, your debts are paid.

While a DMP can be a viable solution to debt, it’s almost never a good solution. It’s just that sometimes it’s better than the alternative, which is bankruptcy.

Here’s why a DMP is not your first choice of debt solutions. First of all, a DMP will hurt your credit. It will probably affect your status with all of your creditors. It also takes a lot of control away from you in that it negotiates with your creditors (you don’t, in fact, you may even be told not to negotiate with them), it decides on how to pay them off, and the DMP pretty much runs the show. You just write a check to the DMP. The DMP will tell you how much to pay and when it's due.

The a reasonable person would opt for a DMP mainly to avoid bankruptcy. It can lower your payments and dig you out of debt. Since it takes over a lot of control, it can be overwhelming but a good DMP knows what it is doing.

It will hurt your credit, but not as badly as bankruptcy can. With a very good company, a DMP may be beneficial to you in the long run.

You can also get in trouble with some DMPs. Poor-quality programs may not pay your creditors promptly, may charge you excessive fees, or may not be able to negotiate the fairest deals for you and your creditors. In short, if you end up thinking DMP, be very careful.

Like anything else in the financial world, DMPs can be found good or bad, a few are outright frauds, and some are in the middle (decent but not wonderful).

If you are shopping around for a DMP, you need a certified credit counselor. You probably cannot even qualify for a DMP without one. But even with one, you need to know when you're in trouble as you look at various DMP programs. Here are some signs that could spell danger for a DMP shopper:

·        Back off if you feel pressured by your certified credit counselor into enrolling in a DMP. A DMP is a plan of almost-last resort. You should explore a lot of other options first. If you have, a DMP might be the logical next step. If you haven't talked about a lot of other programs first, consider it a big red flag.

·        Back off if you are asked to enroll in a DMP before your certified credit counselor has talked to you about budgeting and general financial planning. A DMP is an extreme plan that will only help you in the long term if you develop new money management skills. A DMP without new financial skills is dangerous.

·        Don’t give any personal information (name and address are fine) to a DMP before you get information on the program. You should not have to disclose financial information to find out about the DMP program.  (Some DMPs ask for a lot of financial information upfront, before they even tell you about their program, to trick you into enrolling.) A legitimate business will not need to see your personal financial data to describe to you how their plan works.

·        Don’t sign up for a DMP without being comfortable that you understand what it is, why you need it, and what the terms are. You should know about debt consolidation, debt relief, and other plans by the time you get to the DMP. If you're getting a high-pressure sell, that's a danger sign.

·        Run if you are told that you need to pay some sort of high fee, service charge, or a regular monthly charge for a DMP. There may be a charge, but it should not be exorbitant. If it seems excessive, shop around and compare. (On the other hand, you will need to pay some fees.)

·        Do not sign up for a DMP unless you are sure your creditors will accept it. You see, you can only do the DMP plan if all of your creditors agree to it. If they won’t go along with the plan, you could wind up in bankruptcy no matter what. So don't jump into a DMP without knowing if your creditors will cooperate.

If you get spooked by a DMP, don’t despair. Seek out a certified credit counselor (go to the NFCC website) or, if that’s who scared you, go and get a second opinion.

No kidding. Sick people go to one doctor (even a trusted doctor) but still get a second opinion before undertaking a serious procedure. Why do anything less with your financial health?

Debt negotiation plans (also known as debt relief plans) are offered by companies or organization that work with your creditors to settle your debts for less than you owe. Debt negotiation, sometimes called debt relief, can sound good but many companies in this field are shady.

Not only that, some are more shady than others.

While they can negotiate, they do so by telling your creditors you’re just a step away from bankruptcy. In other words, the way they negotiate with your creditors is by telling them that you're on the brink of bankruptcy and they may not get anything for the debt at all if they don't take this partial settlement right now. Nobody likes that kind of tactic.

It will hurt your credit score, and many debt negotiation plans charge high fees, too. After all, somebody has to pay for the negotiators.

By the way, if you get some of your debt forgiven, the IRS counts it as income, so you’ll owe taxes on it. This can create a real financial hardship because the amount that is forgiven is never paid to you in cash. For example, if you get $20,000 of your total debt forgiven, the IRS is going to ask you to pay taxes (in cash) on that extra $20,000 in income.

Not only that, but the extra income (which you never saw as cash) can throw you into a different tax bracket. If you're in some low-income programs, the extra income can even disqualify you. Once again, this is a bit of a hardship since that "income" is on paper only and not a wad of money in your hot little hands.

A certified credit counselor will almost never steer you toward a debt negotiation plan.

Overall, debt consolidation is a good measure to manage debt, but not everyone qualifies. Certified credit counselors can review your situation and offer your financial solutions that are appropriate for your situation. Bankruptcy is the last resort, because it ruins your credit and causes you to lose control of your finances. Sometimes you need an extreme measure and that may be a DMP, but that is unusual, not the norm.

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