- A debt management plan is offered by nonprofit credit counseling agencies to help consumers wrangle outstanding balances.
- The plans deliver a single monthly payment toward a variety of accounts, typically at a lower interest rate.
- Not all debt types are eligible for debt management plans, and creditors must agree to participate before the plan can work.
- There are pros and cons of these programs, including positive and negative consequences for your credit.
A debt management plan (DMP) is a counselor-curated way to consolidate accounts, reduce your interest rates and pay off outstanding balances over a three-to-five-year period. Enrolling in a low-fee DMP—also known as a debt management program—requires a counseling session and closing your credit card accounts. But it could be the boon you need to become debt-free or to at least get right with your money.
Enrolling in a debt management plan isn’t the best move for everyone, however. There are pros and cons, such as the fact that your credit score should improve over time but your credit report won’t immediately recover from negative effects like a poor payment history.
Let’s review when you might consider a DMP, how to enroll in one and what alternatives you could consider before taking the plunge.
Inside this article
What is a debt management plan?
With a debt management plan, you can group (or consolidate) all of your eligible accounts into one affordable monthly payment, likely at a lower average interest rate than you were previously paying. The plan, set up in concert with a credit counselor and your creditors, would have equal-sized monthly payments for three to five years.
What may be included in a debt management plan:
Accounts in collections
Lines of credit
Past-due balances for routine monthly bills
Unsecured personal loans
Unfortunately, debt management programs aren’t fool-proof. Some of the same life events that might cause your financial struggles before you enroll in a DMP can also occur after you enroll in one.
“We do everything possible to problem-solve the situation and bridge any temporary income gaps through a short-term DMP modification, but there are times the chasm is too deep,” says Becky House, a former credit counselor and current director of strategic initiatives at American Financial Solutions (AFS), a national nonprofit agency. “In those cases, clients will need to cancel their plan and potentially seek legal counsel.”
Meet the Expert
Becky House, a former credit counselor and current director of strategic initiatives at American Financial Solutions (AFS), a national nonprofit agency.
Plus, don’t expect your credit report and score to recover immediately. Promises of immediate credit repair is a red flag that you might be the target of a debt relief scam, not a legitimate credit counseling agency.
“Be aware that [a DMP] will not erase negative items from your credit report,” says Leslie Tayne, a New York-based debt relief lawyer. “If an agency tries to tell you otherwise, run!”
Pros and cons of debt management plans:
- No credit check necessary to qualify
- Receive expert, one-on-one help coming up with an affordable repayment plan
- Get on a path toward becoming debt free within three to five years
- A single monthly payment, as opposed to multiple bills from multiple creditors
- Joiner and monthly fees are low, especially in comparison to interest you shell out to creditors
- Makes it easier to budget for your monthly debt obligations
- Reduced rates, halted fees and collections calls are among other benefits
- Could help you avoid bankruptcy
- You’ll likely be required to close all credit cards while enrolled (except if one might be needed for emergency expenses)
- Generally, only unsecured debt can be included in a DMP, so it may not help you manage secured debt that was borrowed with collateral (such as a home or auto loan)
- Creditors have to agree to participate in the plan, and it’s possible that some won’t
- A DMP notation on your credit report could be viewed negatively by lenders if you intend to borrow in the future (though your credit should improve over time if you successfully make it through a DMP)
How exactly does a DMP affect your credit?
Enrolling and successfully making it through a debt management plan can have positive and negative consequences for your credit report and credit score.
After your first three payments on a DMP, for example, creditors typically mark your account as current—not delinquent—and that can begin to improve your credit score.
|Positive impacts on your credit||Negative|
|If a creditor notes your DMP-enrolled account as “current,” it could improve your payment history, and therefore credit score||Your credit utilization ratio—the amount of your available credit that you use—could increase, dropping your credit score|
|Repaying your balance in full could improve your score (at least more than it would if you settled debt for less than you owe)||Closing your credit cards could decrease the length of your average account history (though the accounts wouldn’t fall off your credit report for up to 10 years)|
When is it wise to enroll in a debt management program?
A DMP isn’t the best route for everyone toward a debt-free existence. Below are some guidelines as to whether a plan might—or might not—be wise.
A debt management plan might be right for you if…
You have experienced some type of hardship, such as unemployment divorce or health problems, and need assistance getting back on your feet
You’re borrowing up to or near your credit limits
You have above-average, perhaps double-digit interest rates
You have missed past payments
Your budget has been out of whack
You have enough income and not so many expenses that you can afford the modified payments on a debt management program
Meet the Expert
Leslie Tayne, a New York-based debt relief lawyer
A debt management program might not be right for you if…
You don’t have the cash-flow to afford even modified repayment terms
You have creditors, lenders or debt collectors that won’t agree to participate in the debt management plan (which often occurs for secured loans and payday loans, House says)
You have just one or two creditors and they’re willing to modify your repayment terms without needing to enroll in a debt management plan
You have the means to afford more than your current minimum monthly payments and could benefit from an alternative repayment method
How do you enroll in a debt management plan?
Though similar, debt management plans aren’t one-size-fits all. One counseling agency might allow you to lump student loans into your DMP, while another won’t, for example. That makes finding the right counselor among the key steps to enrolling in a plan.
1. Find help: Contact a 501(c)(3), nonprofit credit counseling agency that’s accredited, licensed and a member of the National Foundation for Credit Counseling or the Financial Counseling Association of America. Also, ask about the fee structure—and get it in writing, says Tayne.
“Do your due diligence before signing a contract,” adds Tayne. “The agency should have few complaints, employ qualified, well-trained counselors, offer financial education alongside the debt management plan and provide services at an affordable rate.”
Even better if the agency can give you tools to manage and track your repayment progress.
Examples of legitimate credit counseling agencies
|Company||Initial fee||Monthly fee|
|American Consumer Credit Counseling||$39||$7|
|Clearpoint Credit Counseling Solutions||Up to $50||Up to $75|
|Cambridge Credit Counseling||Averages $40||Averages $30|
|GreenPath||Up to $50||Up to $75|
2. Confirm you’re a good candidate: Sit down for a credit counseling session with a certified professional who will help to determine whether a debt management program could help in your situation.
“This session should be individualized and include a review of needs, goals, circumstances and resources,” says House of AFS. “Additionally, a discussion of current spending, strategies for maximizing income, and a credit report and score review will provide the necessary insight into capacity and eligibility.”
3. Know what comes next: If you and your counselor decide to move forward, be aware that your credit and loan accounts will be closed, and that borrowing while enrolled in the program isn’t advised or, in many cases, allowed.
“Bear in mind,” says House, “the DMP is meant to be a long-term solution that ultimately leaves the consumer debt-free.”
What are the alternatives to debt management programs?
If you determine that a debt management plan isn’t the right course of action for you, you’re not out of luck. Consider the following strategies for debt repayment and relief.
Balance transfer credit card: If you have good credit (or a creditworthy co-applicant), you could qualify for an introductory rate of 0% on a balance transfer card. This piece of plastic in your wallet would pay off your existing debt and replace it with a new balance. You would also need the cash-flow to repay the new debt before the no-interest promotion expires (typically in 12 to 18 months).
Consolidation: You could group your outstanding balances via debt consolidation or refinancing. A common way to group your debt to pay it off more effectively (beyond balance transfer cards) is taking out a personal loan. Debt consolidation options for bad credit are more limited than if you have good credit or a cosigner.
Hardship help: Open the lines of communication with your creditor to see if they will offer a repayment pause or interest rate reduction. If you recently lost your job or faced a medical emergency, for example, you might qualify for temporary relief, depending on the type of debt in question. Student loans, for example, typically have deferment and forbearance options.
Settlement: If your creditor doesn’t offer relief programs or perhaps the account is already in the hands of a debt collection agency, you could attempt a debt settlement. This involves agreeing to pay less than what you owe, either via lump sum or a payment plan. Negotiating with debt collectors can be tricky, however, and might require legal assistance.
Bankruptcy: Filing for bankruptcy can help you discharge debt (Chapter 7) or come up with an affordable payment plan (Chapter 13), but it’s a true last resort option that has repercussions on your credit for years to come. Before proceeding, it could be worth talking to a bankruptcy lawyer.