Creating a debt management plan helps consumers pay debt, reestablish credit and begin to regain control over their finances. However, many avoid doing so because of misconceptions about the way that debt management plans work. In some cases, people have been purposely misled by debt counselors to believe myths about debt consolidation. For others, insecurities about being unable to pay debt obligations have convinced them that they are precluded from creating a debt management plan that works.

Debt management plans explained

A debt management plan (DMP) is created with a trained counselor who is willing and able to help consumers pay debt and rebuild credit profiles. In order to do so, a consumer agrees to regularly deposit money into an account and allow the counselor to pay debt that it owed from that money. An added bonus of a DMP is that many debt collectors are inclined to lower or eliminate fees that have accrued on the account due to previous non-payments. When a counselor is allowed to pay debt on behalf of the consumer, most creditors realize the opportunity to collect what is owed to them and are willing to cooperate in making it affordable to do so.

Dispelling myths about debt management plans

While many creditors view a debt management plan positively, it is never guaranteed that they will do so. It should be clearly understood that the creditor is under no obligation or expectation of reducing amounts owed, but such is done as a courtesy at the creditor’s discretion. Therefore, existing fees should always be factored into the overall budget used to pay debt.

People are also sometimes reticent to participate in a DMP because they have heard rumors that doing so will hurt their credit. For the most part, this is false. In fact, more often than not, the opposite is true. Many creditors view DMPs as a person being serious about regaining control of their finances and repairing their credit. While it is up to individual creditors as to whether or not they will grant future credit, many are inclined to do so as they see a person taking serious strides to pay debt. Also, creating a debt management plan does not adversely affect one’s FICO score at all and, in fact, the Fair Isaac Company does not give reference to debt counseling on one’s credit report.

A Word to the Wise on Debt Counseling

Many have also been afraid of creating a debt management plan because they have been in contact with unscrupulous debt counselors. Unfortunately, charlatans exist in every industry and financial planning is not exempt. In some cases, people have been told that the best way to repair their credit is to pay an exorbitant fee to a counselor, while ignoring past debts. In these scenarios, people have trusted supposed experts to do the right thing and, instead, their credit has been further ruined as their hard-earned money has been pocketed, while their debts have sometimes worsened.

Rebuild credit and a new financial future with a debt management plan

Overall, a debt management plan is a great way to pay debt while reestablishing one’s credit. Often, perks such as lower fees on existing debt and new credit is extended, though not guaranteed. As people become more educated on options available to them to pay debt and rebuild credit, the allure of a debt management plan becomes a perfectly reasonable option and one that can realistically give people control over their financial futures, once again.

Credit counseling and a debt management plan can lead to greater peace of mind for consumers in a bind, but proper education is needed first. (Photo: picasaweb.google.com)

When a consumer enters into credit counseling, a common element of any program is what’s called the debt management plan (or DMP). In a DMP, the consumer agrees to make a set monthly payment to their credit counseling agency. Those funds are in turn used by the credit counseling agency to repay the debtor’s bills, loans and other debts according to a schedule made with the creditors. The presence of the credit counseling agency in the transaction may persuade the creditors to be amenable to lowering interest rates or waiving fees, not to mention staunching the flow of credit collection calls the consumer had been receiving. Provided that something more than free counseling but less than bankruptcy filing is needed, a DMP can be a useful tool in protecting a consumer’s financial interests and helping them to move forward and repair credit.

Benefitting the Consumer

A 2008 study entitled “Completing Debt Management Plans in Credit Counseling: An Application of the Theory of Planned Behavior” by Jing Jian Xiao of the University of Rhode Island and Jiayun Wu of the University of Arizona tenders that the most ideal arrangement for a DMP would be one in which consumers were fully informed of their options and chose the most appropriate course of financial action. At the same time, creditors and credit counseling services alike would deal with the consumer in an ethical, professional manner.

While circumstances surrounding a consumer’s financial troubles rarely fall into place like clockwork, numerous recent studies have shown that consumers who participate in DMPs show ” a significantly lower incidence of bankruptcy over the two years following counseling” (Staten & Barron from 2006). Overall, consumer financial well-being has been observed to improve.

Xiao and Wu Study the Link between Attitude and Behavior

In other words, they apply the theory of planned behavior. Consumers’ attitudes toward credit counseling (and the DMP in particular) are important, as the theory hypothesizes that these attitudes will accurately predict future credit behavior. Xiao and Wu study survey and plan completion information from DMP-enrolled consumers in order to go where studies in the field have never been before. While previous studies have attempted to shed some light on the desires and behaviors of consumers who participate in credit counseling, they relied almost solely upon survey data. Xiao and Wu’s use of the theory of planned behavior to identify factors associated with completing the debt management plan is entirely new in the field, according to the study authors.

Positive Attitude, Intention and Results

The authors begin with the survey data from clients of a national credit counseling agency, and then they apply the theory of planned behavior and other methods from literature on the concept of consumer satisfaction. Their goal is to find the link between a consumer’s intent and their actual behavior when completing their DMP. Their discovery is that observed behaviors consistent with the theory of planned behavior had positive effect on consumer’s intentions, post-credit counseling.

Their Findings Have Implications for Credit Counseling Services

DMPs are understandably a significant monetary resource for credit counseling agencies. Predicting how likely consumers are to complete their DMP would hence be useful to the financial stability of such companies. Positive attitude toward completing a DMP plays a very important rule in a consumer’s future intent. It’s much more significant to ask someone “What do you think about completing the debt management plan?” versus “What do you think about the debt management plan?” Thus, the way in which credit counseling agencies approach the matter with their clients can definitely steer them toward more likely completion, which in turn could foster positive attitudes that reflect in how such credit counseling agencies are perceived by consumers.

Help Clients Feel They’re in Control of Debt Management

By providing clients with the necessary information to make informed decisions and periodically updating their progress, credit counseling services can help empower consumers. If said consumers feel as if they’re in greater control of their debt via a well-executed DMP, their instance of intent to complete the DMP is found by the authors to be higher. Greater client satisfaction is central to credit counseling success, which would indicate that if the agencies consistently treated clients with respect, there would tend to be positive result. Meeting consumer need and even exceeding expectations – a good recipe for any business transaction – leads to a greater likelihood of DMP completion. This is beneficial to all parties involved, from the client to the credit counseling agency to creditors.

What Can Educators Take From Xiao and Wu’s Study?

Determining a credit counseling client’s behavioral intention comes down to two factors, say the authors: “Attitude toward the behavior and perceived behavioral control.” When developing programs to promote positive behavior development, educators should consider directing subject attention to attitude toward the desired behavior as well as the method used to promote behavior (in this case, the DMP). Clear benefits and consequences of DMP completion should thus be made available to credit counseling clients. If such information is made available as a part of a financial education curriculum, the authors feel that consumers could possibly have a more favorable attitude toward DMPs should they ever have the need. Possible psychological barriers could be lessened.

Knowledge: the Key to Positive Attitude and Intent

Xiao and Wu findings suggest that if a consumer in credit counseling finds a DMP that best suits their needs, satisfaction levels can be significantly high. Education as to what the programs entail is most important. In order for consumers to have the optimal attitudes toward DMP usage, they also need to be aware of other options available within the credit counseling industry. Knowledge leads to well-informed choices and greater satisfaction, per the authors’ findings. It should be noted that another important part of a consumer’s financial education should include how to avoid marketing scams, as some segments of society view credit counseling and debt management plans with negative or exploitative. There are many reputable credit counseling agencies that would benefit from heightened consumer awareness.

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