What is a debt management plan?

A payment plan can help ease your debt stress, but it comes at a cost

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A debt management plan is a framework for gradually repaying debt. It can consolidate your debts into one monthly payment, reduce the amount of interest you pay and, depending on the amount of money you owe, help you get out of debt within a few years.

According to the Federal Reserve Bank of New York, total household debt in the United States reached $16.9 trillion in the fourth quarter of 2022. Credit card balances reached $986 billion during that same period, exceeding the pre-pandemic high of $927 billion. Plus, there are more delinquencies on nearly all types of debt than in the recent past.

If you’re one of the millions of Americans with a significant amount of unsecured debt, such as debt from credit cards and personal loans, a debt management plan might make your debt burden more manageable.

Key insights

  • Debt management plans offered by nonprofit credit counseling agencies can help you fully repay your unsecured debt in three to five years.
  • You’ll usually need to pay a one-time enrollment fee and a monthly fee if you participate in a debt management plan.
  • You can usually only enroll unsecured debt, like credit cards and personal loans, in a debt management plan.

How do debt management plans work?

A debt management plan (DMP) is a type of debt relief commonly offered by credit counseling agencies. DMPs are usually designed to help you fully repay your unsecured debt in three to five years.

When setting up a DMP, your credit counselor will often negotiate lower interest rates and reduced fees with your creditors, which might reduce your overall borrowing costs. A DMP can also consolidate multiple debts and streamline the debt repayment process; you’ll make only one monthly payment to your credit counseling agency until your enrolled debts are fully paid and the DMP is complete.

While getting out of debt and reducing the cost of that debt are usually a DMP’s primary attractions, a DMP can benefit your credit score as well. Making on-time payments over the course of a DMP can help you build a consistent payment history, which makes up 35% to 41% of your credit score, depending on the model used.

Establishing a DMP

If you think a debt management plan might be right for you, follow these steps to establish one:

  1. Meet with a credit counselor. You’ll begin the process by receiving a free counseling session from a nonprofit credit counselor. The credit counselor will review your finances and help you create a plan for repaying your debt.
  2. Identify the monthly payment you can afford. Your credit counselor will help you create a budget during your counseling session. If you can’t afford to fully repay your unsecured debt within three to five years, you may need to consider an alternative to a DMP, like bankruptcy or debt settlement.
  3. Determine what debt, if any, you want to enroll. You can only enroll your unsecured debts in a DMP, such as credit card and personal loan balances. If you only have secured debt, a DMP won’t work for you. Also, the accounts you enroll in the DMP will likely be closed. So, if you want to continue using your credit cards, a DMP might not suit you.
  4. Agree to a repayment schedule with your credit counselor. Once you’ve selected the debts you want to enroll in the DMP, your credit counselor will set a monthly payment plan and negotiate lower interest rates and fees with your creditors.
  5. Make monthly payments. After creating the payment plan, you’ll make one monthly payment to your credit counseling agency on all the enrolled debt. The agency will then distribute your payment to your creditors for you. In exchange, you’ll usually pay a one-time enrollment fee and a monthly fee to the agency, both of which will likely be below $75.

If you’re struggling to pay off your unsecured debt, a DMP can be a way to help you get your finances in order. To this point, Doug Carey, a chartered financial analyst and the founder of retirement planning software company WealthTrace, explained that DMPs and credit counseling can not only help people reduce their debt but also help them “get back on the path towards financial stability,” which are both good potential outcomes.

» MORE: Best debt management plans 

Types of debt relief

There are many types of debt relief you can consider aside from debt management plans. Other options include debt settlement programs, debt consolidation loans and even DIY debt relief strategies.

Debt management plan
A DMP is a payment plan created by a nonprofit credit counselor to help a consumer fully repay their unsecured debt. If you enroll in a DMP, your credit counselor may negotiate with your creditors to waive or reduce your fees and lower the interest rates on your debts.

While an initial consultation with a credit counselor should be free, you’ll typically need to pay some fees to participate in a debt management plan. A DMP’s setup fee and monthly fee will usually be less than $75 each.

A DMP only works if you can afford the plan’s regular monthly payment for all the enrolled debt and are disciplined enough to keep making that payment for three to five years. If your payment is late or missed, your plan might be canceled. If you can’t see yourself making the payment for the plan’s duration, you may be better off choosing a different debt relief option.

Debt settlement
Debt settlement is a service offered by for-profit debt relief companies. Representatives from debt settlement companies negotiate with your creditors to reduce the amount of debt that you’re obligated to repay.

If you agree to participate in a debt settlement program, you’ll make payments into a designated savings account rather than paying your creditors directly. The funds that accumulate in that account will then be used by the debt settlement company to make lump-sum debt payments to creditors per the terms of the settlement.

Most debt settlement companies charge a performance-based fee for the settlements they successfully negotiate with creditors. The fee is typically about 15% to 25% of the debt amount that the company attempted to settle. These fees usually aren’t refundable, so it’s crucial to only agree to a debt settlement program if you’re confident that you can complete it.

Additionally, you might owe income taxes on any forgiven debt. So, it’s a good idea to meet with a tax expert before proceeding with a debt settlement program.

Debt consolidation
If you have at least fair credit (a credit score of 580 or better) and enough income to afford a monthly debt payment over a period of several years, it might make sense to refinance your high-interest debt using a debt consolidation loan .

A debt consolidation loan is simply a personal loan that pays off multiple debts and leaves a borrower with one loan payment, hopefully at a lower interest rate. Many banks, credit unions and online lenders offer debt consolidation loans. You can typically apply online, and funds are usually disbursed within one week.

Remember that you won’t get counseling or budgeting help with a debt consolidation loan. So, if you’re struggling with your spending or need help setting up a budget , you might want to supplement a debt consolidation loan with advice from a credit counselor or other personal finance expert.

Some financial institutions also offer free advice you can use to help get your finances in order. “For instance,” explained Cody Sparks, the director of retail banking at UMB Bank, “a personal banker can … bring your current financial picture into focus by assessing your income compared to your expenses and debt.”

Once you’ve had this conversation with your banker and discussed your financial goals, they’ll help you “create a roadmap with actions to help you achieve those goals,” he said.

» MORE: How does debt consolidation work?

Do-it-yourself debt relief strategies
Aside from or in addition to seeking external debt help, you can also work on reducing your debt using DIY debt relief strategies. Two common strategies are called the debt snowball and the debt avalanche.

With the debt snowball strategy, you make the minimum payments on all your debts and simultaneously “put as many dollars as possible toward your smallest debt balance each month,” explained Sparks. You’ll repeat the process with the next smallest balance until all your debt is repaid.

The debt avalanche is slightly different than the snowball. After making minimum payments on all debts, you then direct any extra funds toward repaying the debts with the highest interest rates. A benefit of this approach, explained Sparks, is that “you can save money by not letting interest accumulate.”

If you’re disciplined and self-motivated, these DIY strategies may provide a way for you to get out of debt on your own. Plus, you won’t have to pay fees to a credit counseling agency or debt settlement company.

Pros and cons of debt management plans

A debt management plan isn’t always the best solution for someone struggling with credit card debt or other unsecured balances. Make sure to consider both the pros and cons before registering with one.

Benefits of a debt management plan

  • It combines all enrolled debts into one payment each month. Participating in a debt management program can simplify your finances by rolling multiple monthly debt payments into just one.
  • It can reduce your overall borrowing costs. A good credit counselor can negotiate lower interest rates with your creditors, which may help you save a significant amount of money over time.
  • It diverts calls from collection agencies. A major benefit of a debt management plan is that you can direct calls from pesky collection agents to your counseling agency.

Disadvantages of a debt management plan

  • Not all debt can be enrolled. This type of debt relief is designed for certain kinds of unsecured debt, such as credit card debt. You’ll need to find a different debt relief option if you’re struggling with student loans or an auto loan.
  • Access to credit may be limited. Debt management plans last anywhere from three to five years. You’ll usually need to close the accounts you enroll in the plan, meaning you can’t use them. If you depend on these types of accounts to make payments (e.g., you need your credit card for travel), a debt management plan may not be right for you.
  • Missing a payment could hurt. A missed DMP payment might result in your lender(s) increasing rates, and multiple missed payments could result in the DMP’s cancellation.

Could your debt be reduced or forgiven? Take our financial relief quiz.


    Can creditors refuse a debt management plan?

    Yes, creditors can refuse a debt management plan, but it’s unlikely. Debt management plans benefit both the creditor and borrower by ensuring that the creditor gets its funds back and the borrower can afford payments.

    Can you pay off a debt management plan early?

    Yes, you can usually pay off a debt management plan early without incurring any fees. Nonetheless, it’s a good idea to ask the credit counseling agency in advance if there are any prepayment fees associated with its plans, just to ensure you fully understand what’s required and allowed.

    Does a debt management plan hurt your credit?

    Enrollment in a debt management plan may be noted in your credit reports, but it won’t directly affect your credit score.

    Since debt management plans usually involve closing credit accounts, there’s a chance that your credit score will drop a bit at the beginning of a debt management plan. But making a long series of on-time payments over the course of a debt management plan should ultimately help improve your credit score.

    Can I get a credit card while on a debt management plan?

    You might be able to get a credit card while on a debt management plan, but it could be unwise. If you’ve historically had trouble managing your credit, opening up new credit lines while you’re still working on establishing responsible financial habits may lead to further debt issues that undermine your progress.

    Is a debt management plan the same as debt settlement?

    No, a debt management plan is not the same as debt settlement. You can sign up for a debt management plan with a nonprofit credit counseling agency, whereas debt settlement programs are offered by for-profit companies.

    Another key differentiator between these two programs is that you repay all the principal you owe to your creditors with a debt management plan, whereas the primary goal of debt settlement is to repay your creditors less principal than you owe.

    Bottom line

    A debt management plan can have many benefits, but it’s crucial to consider all its potential ramifications carefully before signing up. Make sure you’re working with a trustworthy credit counseling agency that has a high percentage of completions, solid reviews and low fees. Take time to research and ask plenty of questions before committing to a program.

    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
    1. Federal Reserve Bank of New York, " Household Debt and Credit Report (Q4 2022) ." Accessed April 21, 2023.
    2. Federal Trade Commission, “ How To Get Out of Debt .” Accessed April 21, 2023.
    3. FICO, “ What's in my FICO Scores? ” Accessed May 8, 2023.
    4. VantageScore Solutions, " VantageScore 4.0 User Guide ." Accessed May 8, 2023.
    5. IRS, " Topic No. 431, Canceled Debt – Is It Taxable or Not? " Accessed April 21, 2023.
    6. Debt.org, “ Debt Management Plan: Pros, Cons and FAQs .” Accessed May 1, 2023.
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