A Debt Management Plan: Is It Right for You?

Woman looking at bills and receipts on floor

Some types of loans, such as a mortgage, can be a stepping stone toward building wealth and financial health. However, too much debt can leave you juggling bills without a clear path toward financial freedom.

Credit counseling organizations offer debt management plans (DMPs) as a solution for people who are struggling with unsecured loans, such as credit card debt. By getting on a DMP, you may be able to lower your interest rates and monthly payments, allowing you to repay your debts and avoid the negative impact of defaulting or declaring bankruptcy.

Before you initiate a debt management plan, it's important to understand how the process works, as well as the benefits and drawbacks.

What Is a Debt Management Plan?

A debt management plan is a type of repayment plan that's set up and managed by a credit counseling agency. Many credit counseling agencies are nonprofit organizations that offer education and assistance to help people better manage their finances.

When you work with a credit counseling agency, you'll meet with a counselor who will review your financial situation and help you understand your options. If a DMP is a good fit, the counselor can negotiate with your creditors on your behalf to create new payment plans.

As part of the negotiation, creditors may waive fees and lower the interest rate on your accounts if you agree to repay the debt through a DMP. With many DMPs, the goal is to have your debts fully repaid within three to five years, which is easier to do when less interest accrues each month.

Once you start the DMP, you'll make a single monthly payment to the counseling agency, which will then distribute the money to your creditors. The agency may also charge you a small monthly fee for the service, but your interest savings could more than cover the cost.

Generally, DMPs are only available on accounts that aren't backed by collateral, such as credit cards. And while you may be able to pick and choose which accounts you want to include in your DMP, you'll need to close all the credit cards that are part of the DMP.

What Are the Benefits of a Debt Management Plan?

Borrowers who are struggling with their bills may find a DMP offers a sense of relief and a practical solution. Particularly if you're feeling overwhelmed or you're making monthly payments and the balance never seems to decrease, a DMP can put you on a path to paying off your debts.

The main benefits of working with a counselor and getting on a DMP include:

  • Professional advice: You'll start with a financial counseling session where a counselor will go over your budget, debts, goals and options to help you determine the best course of action. Even if you don't go with a DMP, you may find this initial (often free) session helpful.
  • Waived fees and lower payments: The counselor can work with your creditors to waive previously charged fees and lower your monthly payments, helping you pay down your debts more quickly and freeing up room in your budget for other necessary expenses.
  • Debt deleted sooner: The counselor may also be able to negotiate lower interest rates on your debts, which means a larger portion of your payment goes toward the principal balance, and you'll be out of debt sooner.
  • One monthly payment: You receive one monthly statement and send one monthly payment to the counseling agency. It can be much easier to manage than juggling bills from multiple creditors.
  • Accounts brought current: If you've fallen behind on payments, you might not be able to afford to pay your entire past-due balance—even if you can afford the monthly payment. As part of a DMP, your creditors may agree to "re-age" your account and update the account status to current, saving you on late fees, after you make several on-time payments through the DMP.
  • Fewer calls: If you're able to include past-due accounts or collection accounts in your DMP, the creditors and collection agencies should stop calling. But it can take several months for calls to stop, as it takes time for all the paperwork and processing to get worked out.
  • A plan with accountability: You could stick to making minimum payments on credit cards and be stuck with the debt for years. But with a DMP, you'll have a plan for paying off the debt and a credit counselor who will keep you accountable.

Your credit counselor may be able to offer support or referrals to help you manage other aspects of your finances. For example, some agencies offer budgeting, homebuying, student loan and bankruptcy workshops, and have trained counselors who can help you navigate all these situations or goals.

What Are the Disadvantages of a Debt Management Plan?

There are also potential drawbacks to getting on a DMP rather than a different type of debt consolidation or repayment program.

  • It won't include every debt. DMPs generally won't include your secured debts and some types of unsecured loans, such as student loans. Counselors may be able to offer guidance, but you'll generally need to manage those payments on your own.
  • There are fees. You may need to pay an initial setup fee (such as $30 to $50) and a monthly fee (often ranging from $20 to $75) to participate in a DMP. The amounts can vary depending on the counseling agency and state laws, and your financial situation may qualify you for waivers or accommodations.
  • Less access to credit. You'll have to close any credit cards that you include in the DMP, which will diminish your access to credit throughout the month. Your creditors may also monitor your credit reports and require you to stop using credit cards that aren't part of the DMP while you're participating in the program.

During the initial counseling session, the counselor can help you review your financial situation and determine which options are best. Sometimes, a debt consolidation loan or balance transfer credit card might make more sense. Getting a debt consolidation loan with bad credit may be difficult. If your situation is severe, it might warrant bankruptcy to clear away overwhelming debts and get you on a more manageable repayment plan.

Does a Debt Management Plan Affect Credit?

Working with a credit counselor or starting a DMP won't have a direct impact on your credit scores. However, notes that you're working with a counselor or using a DMP could be added to your credit report, and the DMP process can indirectly impact your credit in several ways:

  • Closing accounts may increase utilization. Your credit utilization ratio is the percentage of your total available credit on revolving accounts (such as credit cards) that you're currently using. A lower utilization ratio is better for your scores. Closing credit cards can decrease your available credit and lead to a higher utilization ratio if you keep other non-DMP credit card accounts open.
    The exact impact, however, will depend on your specific situation and the type of credit score. Some scoring models won't include any closed accounts in utilization calculations, while others—including FICO—may include closed accounts that have a balance when determining utilization.
  • Bringing accounts current can help you build positive payment history. If your creditors agree to re-age your past-due accounts and change their status to current, your monthly DMP payment will result in on-time payments on all accounts included in your DMP. These can help you build positive payment history, which is the most important credit scoring factor.
  • You'll repay your accounts in full. A DMP can result in waived fees and lower interest rates, but you'll still be paying your accounts in full when you complete the DMP. This may be better for your credit than settling debts for less than the full amount.

Keep in mind, too, that contrary to popular belief, closing credit accounts won't immediately impact the length of your credit history and the mix of account types in your credit history. Closed accounts can stay on your credit reports for up to 10 years, and they can continue to impact your credit history's length and credit mix during this time. As a result, closing accounts as part of a DMP (or for any other reason), won't have an impact on these scoring factors for a long time.

Getting Started With a DMP

If you think a DMP might be a good option, find a trained credit counselor and meet with them in person, or work with a counselor over the phone or online if you'd prefer.

Many, but not all, credit counseling agencies are nonprofits, and you may want to limit your search to nonprofits. You can start by looking for agencies that are part of the National Foundation for Credit Counseling or Financial Counseling Association of America, two certification organizations, or are accredited by the Council on Accreditation.

In preparation, you could review your credit report and make a list of your current debts—information that you may have to prepare and share with your counselor before the initial consultation. You can start by checking the accounts listed on your Experian credit report for free online.