What Is a Debt Management Plan?

A debt management plan (DMP) helps overwhelmed borrowers pay back unsecured debts, like credit cards or personal loans. Nonprofit credit counseling agencies typically set up, negotiate and manage these plans on your behalf for select fees.

DMPs can help you manage multiple debts more easily and save you on interest, but there are drawbacks. Namely, they can't assist with all debt. They also require a lengthy three- to five-year commitment during which your access to credit remains limited.

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How a Debt Management Plan Works

Debt management plans, also called debt management programs, are effectively a financial product offered by non-profit credit counseling agencies.

1. The agency reviews your existing debts and determines whether you're a candidate. If you are, your agency will put together a structured repayment plan to consolidate your bills into one affordable monthly payment.

2. The agency negotiates with your creditors to lower interest rates, waive fees, and even decrease outstanding balances.

3. Once a DMP is in place, you make one monthly payment to the agency, which disburses the funds to your creditors.

4. In exchange for its services, you pay the agency a one-time set-up fee, usually $30 to $50, and a recurring monthly fee, usually $20 to $70.

How a Debt Management Plan Affects Your Credit

DMPs usually don't affect your credit directly as they're not usually reported to the major credit bureaus and if they are, they're not used to calculate your credit score.

However, they can indirectly impact your credit in the following ways.

Your Credit Utilization Could Spike

Your credit utilization is made up of outstanding balances vs. total available credit. DMPs require you to close accounts, which can raise your credit utilization rate, causing your score to drop at least while you still owe your creditors.

Your Length of Credit History Could Shorten

Account closures can also negatively impact your credit history length. However, the effects are often minimal as closed accounts remain on your credit report, and length of credit history only accounts for a small percentage of your credit scores.

Your Payment History Could Improve

DMPs can help you get delinquent accounts up-to-date as they make monthly payments more affordable. Sometimes, creditors agree to report past due accounts as current during the negotiation process. In either case, so long as you make timely DMP payments, your credit should improve, given payment history is the most significant factor among credit scores.

What Debts Can Be Included in a Debt Management Plan?

Debt management plans typically include unsecured debts and some other debts, such as:

• Unsecured personal loans

• Credit card balances

• Medical debts

• Collection accounts

Debt management plans typically exclude secured debts and some unsecured debts, such as:

• Mortgages

• Auto loans

• Secured personal loans

• Student loans

• Tax debts

• Child support

• Alimony

• Legal expenses

Pros and Cons of a Debt Management Plan

Evaluate the following pros and cons to determine if a debt management plan is worth it.

Pros

• Streamlines unsecured debt into one monthly payment

• Credit counselor negotiates on your behalf

• Negotiations can result in lower costs

• Gives you a debt pay-off plan, alleviating stress

• Helps you avoid bankruptcy and serious credit consequences

• Could stop or lessen debt collection efforts

Cons

• Won't help with all debt types

• Involves set-up and monthly fees

• Requires lengthy three-to-five-year commitment

• Some creditors may reject the proposed payment plan

• Must close credit accounts

• Access to credit is restricted while the plan is in place

Debt Management Plan vs. Other Debt Solutions

Debt management programs aren't your only option. In fact, depending on your situation, you might benefit from these alternative solutions to help you get out of debt.

DMP vs. Debt Consolidation Loan

Debt consolidation loans also allow you to combine multiple outstanding balances into a singular monthly payment. They're a good option if you can still qualify for financing, particularly at a low annual percentage rate (APR).

DMPs, on the other hand, don't require taking out a new loan and are helpful if you're looking for financial planning advice.

👉 Does Debt Consolidation Hurt Your Credit?

DMP vs. Bankruptcy

Bankruptcy is a legal mechanism that allows you to secure critical -- and court-ordered -- debt relief. It applies to more types of debt than a DMP but can have a devastating impact on your credit. Depending on the type, bankruptcy stays on your credit report for seven to 10 years.

As a result, bankruptcy is often considered a last resort for overleveraged borrowers.

DMP vs. DIY payoff

DMPs aren't free and require a long-term commitment to set monthly payments, as well as limited credit access. If your debts are still largely manageable, you can try do-it-yourself debt repayment methods, including the following:

Debt Avalanche Method

You'll make all minimum payments and put extra funds toward the balance with the highest interest rate.

Debt Snowball Method

You'll make all minimum payments and put extra funds toward the smallest balance.

Who Should Consider a Debt Management Plan?

Consider these profiles when evaluating your debt-relief options.

DMPs Are a Good Fit If:

• You have high-interest unsecured debt

• You're struggling to manage multiple loan payments

• You can manage at least one monthly payment

• You can't qualify for a debt consolidation loan

• You want to avoid more extreme debt relief options, like bankruptcy

Overall, a DMP "is a strong fit for someone who's current on their payments but not making real progress, usually because of high interest rates," said Josh Richner, founder of debt relief agency FaithWorks Financial. "Since it's not a loan, there are no credit score or debt-to-income requirements, making it accessible even if your credit's taken a hit or you've been denied for consolidation."

DMPs Are Not a Good Fit if:

• You have mainly secured debt

• You can't afford any monthly payment

• You're seeking legal protections

• You want to avoid a lengthy repayment term and credit shutout

• You can self-manage and avoid undue damage to your credit

"Consumers who can manage their debt but simply prefer to pay less are not good candidates," said Michael Sullivan, a personal finance consultant with credit counseling agency Take Charge America. "Neither are consumers who have no chance of repaying their debt, even with assistance. They are likely candidates for bankruptcy or debt settlement."

👉 Pay Off Debt or Save?

How To Enroll in a Debt Management Plan: 5 Steps To Follow

Take the following steps if you feel a debt management plan is right for you.

1. Research Non-Profit Credit Counseling Agencies

"Start with the Better Business Bureau," Sullivan said. "Look for non-profit credit counselors with at least an A rating." Look also for important accreditations, like membership in the National Foundation for Credit Counseling (NFCC) and the Financial Counseling Association of America (FCAA).

2. Contact Your Preferred Provider

Once you contact the provider, schedule a free debt consultation. "Be sure to ask about fees, how creditors are negotiated with, and what happens if you hit a financial snag," said Richner. "Avoid anyone pushing a one-size-fits-all solution. Debt relief should be personalized."

3. Complete Your Free Debt Consultation

Expect the agency to ask about your income, outstanding debts, and other financial obligations. It'll use this information to determine if you'll benefit from a plan, along with how much you can afford to pay each month.

4. Review the Proposed Plan and Terms

The agency will negotiate with your creditors and then present you with a debt management plan agreement that outlines the applicable accounts, the new monthly payment, estimated interest savings, agency fees and the anticipated pay-off date.

5. Enroll and Begin Making Monthly Payments

If you agree to the terms, you'll sign the agreement and start making payments as agreed. Consider setting up an automatic electronic funds transfer so you don't miss any due dates.

FAQs

How long does a debt management plan last?

Most debt management plans take three to five years to complete, though exact timelines vary based on how much you owe and how high — or low — your monthly payment is.

Can you still use credit cards on a DMP?

You can still use a credit card if it's not included in your DMP, as the creditors typically require you to close those accounts when agreeing to a payment plan. You also usually can't open new credit cards while enrolled in a DMP.

Will creditors stop calling once I'm in a plan?

Creditors can still contact you while you're on a DMP, although those agreeing to a payment plan are likely to maintain minimal contact as long as you're making monthly payments. You can inform your agency if a creditor is contacting you excessively to see if they can reduce the frequency of calls.

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