Debt management plans are a way to pay off your balances by working with a nonprofit credit counseling agency. With this approach, you can pay off your debts in five years or less and get other help managing your money.However, debt management plans are not for everyone, and there are some downsides to consider, including limiting your ability to take out new credit.
Key Takeaways
- Debt management plans allow you to pay off your debt in five years or less.
- To start a debt management plan, you need to work with a nonprofit credit counseling agency.
- There may be enrollment and maintenance fees to take part in a debt management plan.
- Debt management plans are only for unsecured forms of debt, such as most credit cards.
What Is a Debt Management Plan?
When you enroll in a debt management plan, you’ll work with a nonprofit credit counseling agency. Your counselor will contact your creditors to gain their participation and may be able to get them to reduce your interest rates, lower your monthly payments, or waive their late fees. A counselor can also help you create a budget, reduce your expenses, and better manage your money.
Under a debt management plan, you’ll make just one monthly payment to the credit counseling agency rather than paying your creditors directly. The counseling agency will disburse the money to your creditors on your behalf, based on a payment schedule they set.
Debt management plans require consistent monthly payments. They usually take three to five years to complete, and you must agree not to use or take on any additional credit during that time. You will likely have to close the credit cards that are part of the plan. At the end of your debt management plan, your accounts will be completely paid off, and you’ll be debt free.
The Pros and Cons of Debt Management Plans
Pros
- Become debt-free within five years: Under a debt management plan, you typically pay off all of your existing accounts within five years.
- Simplify your payments: Instead of having multiple payments and due dates to remember, you’ll make just one payment to the credit counseling agency. Having only one payment can make it easier to manage your money.
- Improve your credit score: As you start making payments under the debt management plan, you may gradually improve your credit score.
Cons
- Lose access to credit cards: To ensure you don’t rack up additional debt, credit counseling agencies will require you to stop using or even close your existing credit cards.
- No new lines of credit: While enrolled in a debt management plan, you typically cannot open any new lines of credit, such as an auto loan or a personal loan.
- Creditors may not participate: Not all creditors will agree to participate in a debt management plan. Student loans and secured debt is often excluded.
3 Credit Counseling Agencies to Consider
There are many credit counseling agencies in operation. While there are typically enrollment and maintenance fees, some agencies will waive those fees in certain circ*mstances.
Below are three nonprofit credit counseling agencies that offer debt management plans:
| Credit counseling agency | Costs |
| American Consumer Credit Counseling | $39 enrollment fee; $7 monthly maintenance fee. |
| Consumer Credit Counseling Service (CCCS) | $0–$50 enrollment fee. $0–$75 monthly maintenance fee (varies by location). Most services are free, but those with a charge may be waived (depending on hardship). |
| Navicore Solutions | Up to $60 enrollment fee, dependent on state of residence; $27 average monthly maintenance fee. |
Be aware of scam artists that may pose as legitimate credit counselors. When evaluating potential agencies, make sure they are nonprofit organizations.
Check any credit agency that you’re considering using with your state attorney general and/or your state consumer protection agency. The United States Trustee Program also has a list of credit counseling agencies.
Alternatives to Debt Management Plans
While debt management plans can be effective tools for repaying your debt, they’re not always the best strategy. For example, secured debts and student loans aren’t eligible for debt management plans, and credit counseling agencies may cap how much debt you can have to participate.
As you consider if a debt management plan is right for you, consider these alternatives:
- Debt consolidation: With debt consolidation, you take out a loan and use it to pay off your older existing accounts. With fixed payments and a potentially lower interest rate, a debt consolidation loan can help you save money and accelerate your repayment.
- Debt settlement: Debt settlement is a risky strategy where you stop making payments and try to negotiate with your creditors for a smaller amount.
- Bankruptcy: If your debt is more than you can afford to pay off, then filing for bankruptcy can remove your obligation to repay all of it. However, bankruptcy will remain on your credit reports for seven or 10 years, depending on the type of bankruptcy. The negative impact to your credit report will make it difficult for you to borrow in the future.
If you aren’t sure which approach is best for your situation, contact a nonprofit credit counseling agency and talk with a counselor about your options.
What Is the Purpose of a Debt Management Plan?
With a debt management plan, you’ll make just one monthly payment to the credit counseling agency rather than paying your creditors directly. The counseling agency will disburse the money to your creditors on your behalf, based on a payment schedule they agree on together. Debt management plans require consistent monthly payments. They usually take three to five years to complete.
Can I Set Up a DMP Myself?
You can set up your debt management plan (DMP) yourself, but you then have to manage your own payments and administer it yourself. Some debt management companies charge for DMPs, but some charities provide this service for free.
Should I Include All Debts in a Debt Management Plan?
You can aim to include all debts in a debt management plan, but not all debt will qualify. Mortgages and other secured debts are not covered by a debt management plan, but in many cases it makes sense to include all of the debt that qualifies.
The Bottom Line
Debt management plans allow you to pay off your debt in five years or less. To start a debt management plan, you need to work with a nonprofit credit counseling agency.
There may be enrollment and maintenance fees to take part in a debt management plan, and debt management plans are only for unsecured forms of debt, such as most credit cards. However, they can help you simplify your debt repayments, and ultimately allow you to get out of debt more quickly.
Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy.
Federal Trade Commission. "How to Get Out of Debt."
Navicore Solutions. "Debt Management."
American Consumer Credit Counseling. "Debt Management Program Fees."
Consumer Credit Counseling Services. "Financial Counseling Service Fees."
Consumer Financial Protection Bureau. "How Can I Tell a Credit Repair Scam From a Reputable Credit Counselor?"
National Foundation for Credit Counseling. "Debt Management Plans."
Federal Trade Commission: Consumer Advice. "How to Get Out of Debt."
I'm a financial expert with a deep understanding of debt management plans and related financial concepts. My knowledge is grounded in extensive research and hands-on experience, and I can provide valuable insights into the intricacies of managing debts effectively.
Debt Management Plans (DMPs):
A Debt Management Plan is a structured approach to paying off debts in collaboration with a nonprofit credit counseling agency. This strategy aims to help individuals become debt-free within a specified period, usually five years or less. The key components and concepts associated with DMPs include:
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Nonprofit Credit Counseling Agencies:
- DMPs require individuals to work with nonprofit credit counseling agencies.
- These agencies negotiate with creditors to potentially lower interest rates, reduce monthly payments, or waive late fees.
- Counselors also assist in budget creation, expense reduction, and overall financial management.
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Payment Structure:
- Under a DMP, individuals make a single monthly payment to the credit counseling agency, which then disburses the funds to creditors based on an agreed-upon schedule.
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Duration and Commitments:
- DMPs typically last three to five years, during which consistent monthly payments are required.
- Participants must agree not to use or acquire new credit during the program.
- Credit cards involved in the plan may need to be closed.
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Pros and Cons of DMPs:
- Pros include becoming debt-free within five years, simplified payments, and potential credit score improvement.
- Cons involve losing access to credit cards, restrictions on new lines of credit, and the possibility of non-participation by some creditors.
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Credit Counseling Agencies:
- Examples of nonprofit credit counseling agencies include American Consumer Credit Counseling, Consumer Credit Counseling Service (CCCS), and Navicore Solutions.
- Agencies may charge enrollment and maintenance fees, but some may waive fees under specific circ*mstances.
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Alternatives to DMPs:
- Debt consolidation involves taking out a loan to pay off existing debts.
- Debt settlement involves negotiating with creditors for a reduced amount.
- Bankruptcy is an option for those with overwhelming debt, but it has long-term credit implications.
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Setting Up a DMP:
- While individuals can set up their own DMP, it involves self-administration and payment management.
- Some debt management companies charge for DMP services, but charitable organizations may offer them for free.
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Ineligible Debts:
- DMPs typically cover unsecured debts, such as credit cards, while excluding secured debts like mortgages.
Conclusion: Debt management plans offer a structured path to debt freedom, but individuals should carefully consider their financial situation and explore alternatives before committing to a DMP. It's essential to choose reputable nonprofit credit counseling agencies and be aware of potential fees. For more information, consult primary sources such as the Federal Trade Commission, National Foundation for Credit Counseling, and specific credit counseling agencies mentioned in the article.
