What is a debt management plan?

Finding a solution to becoming debt-free can be difficult and stressful—especially if you’ve  missed credit card payments and have creditors calling. A debt management plan (DMP) can help you become debt-free in just three to five years, often paying less out-of-pocket than you would if you paid your creditors directly. Debt management plans don’t cover secured debt, like auto loans and mortgages and can sometimes cost a fee, so it’s important to weigh the pros and cons carefully before signing up.^[1]  

Here’s a closer look at what you need to know.  

What is a debt management plan and how do they work? 

A DMP is managed by a credit counseling agency that works on your behalf to help you negotiate more favorable terms and combine all your monthly payments into a single payment.^[1]  

Qualified counselors work with you to make sure the new payment plan fits into your budget. You make monthly payments to the agency, which distributes the funds to your creditors until your debts are paid in full. Some credit counseling agencies may charge you a small fee for the service, but you’ll likely have smaller monthly payments, lower interest rates, or a waived penalty—which can save you money in the long run.^[1]    

Here are some other things to keep in mind about how DMPs work:  

• Only for certain types of unsecured debt. Debt management plans are primarily designed for credit card debt. If you’re struggling with other types of unsecured debt such as student loans or tax debt, you may have to look elsewhere. Secured debt, like your mortgage or auto loan, also can’t be included in a DMP.^[2]   

• No guarantees. While credit counselors may try to negotiate with creditors on your behalf, credit card companies and other creditors aren’t required to agree to new terms and concessions or participate in a DMP. So, you may still be responsible for managing accounts that don’t end up being part of your DMP.^[1]  

• Less access to credit. As part of your DMP agreement, you might not be allowed to open any new credit cards or use your existing cards until your DMP is completed. However, depending on the situation, your credit counseling agency may allow you to keep one card for emergencies.^[2]   

• DMPs take a long time. A DMP may take three to five years to complete. If you drop out early, you’ll still owe the included debts, but your creditors might end concessions the credit counselor was able to secure.^[2]   

• Your credit might take an initial hit. DMPs often require you to close your credit cards, which could hurt your credit score temporarily. However, if you follow through and make your payments on time, you may see your credit score rise as your debts are paid off.^[2]    

Pros and cons of debt management plans 

Borrowers who are struggling with their bills may find DMPs a practical solution that offers relief from unaffordable debt payments. If you’re feeling overwhelmed or your monthly payments aren’t making a dent in your debt balance, a DMP can put you on a path to paying off debts, but they’re not for everyone.^[3]   

Here are some advantages and disadvantages to consider before signing up.  

Benefits of debt management plans 

• Single monthly payment that’s likely lower than your current total payments^[1]   

• Potential to save money if your counselor negotiates lower interest rates and fees^[1]   

• Collection calls will stop while you’re enrolled^[1]   

• Less impact on your credit than debt settlement or bankruptcy^[3]  

• You’ll have an exact end date for when your debt will be paid off^[2]   

Downsides of debt management plans 

• Not available for secured debts, like a car or house^[2]   

• Creditors may not be willing to negotiate with your counselor^[1]   

• You will likely lose access to credit cards for a few years^[2]   

• Your credit score may take an initial dip^[2]   

• Doesn’t address issues with money management^[2]   

• You typically have to pay an upfront fee and monthly fees^[3]  

How debt management plans may impact your credit score

Signing up for a DMP doesn’t directly impact your credit score, but your credit might take a hit while you work on your debt management plan. For instance, you may need to close your credit card accounts—which could hurt your credit score by shortening the average age of your accounts, increasing your credit utilization, and altering your credit mix.^[2]    

When you sign up for a DMP, your credit report may also show that you’re working with a financial counselor. Lenders reviewing your credit report will see this information, but it won’t impact your score.  

Types of debt management plans 

Debt management plans are offered by two types of credit counseling agencies—nonprofits and for-profits. Before signing up for a DMP, be sure to compare different agencies. Whether you decide to work with a nonprofit or a for-profit credit counseling agency, research reviews and complaints from trusted sites, like the Better Business Bureau and Consumer Affairs.^[1]   

It’s also important to compare fees (monthly and startup costs), plan terms, the types of debts you can include, and how long the DMP will take to complete. It may also make sense to narrow your search to agencies that have certified credit counselors and are part of an accredited association, such as the National Foundation for Credit Counseling (NFCC).^[1]  

Nonprofit credit counseling agencies 

According to the Federal Trade Commission, the most reputable credit counseling agencies for DMPs are typically nonprofits that offer services for no cost or at a lower cost than for-profit agencies. In addition to helping with your debt repayment, the agency may also provide access to credit education and budgeting tools. However, the FTC warns that not all nonprofits are legitimate, and some may disguise high fees or ask for contributions that add to your debt.^[1] 

For-profit credit counseling agencies 

DMPs offered by for-profit agencies offer the same services as nonprofit agencies, but might come with higher fees. Watch out for agencies offering DMPs that seem like a “quick fix” or too good to be true. Remember, it takes about three to five years to pay off debt under a DMP.^[1],[2] 

Debt management plan alternatives 

If you’re struggling with debt, a debt management plan isn’t your only option. A qualified credit counselor can discuss the pros and cons of different options that may make sense with your goals and financial situation.^[1]  

For example, you may be able to revise your budget to afford your monthly payments without having to close your accounts or set up a DMP. You might also consider using the debt avalanche method or debt snowball method to tackle your debt.^[4]   

Or, you might find it makes more sense to combine your debts and lower your interest rate with a debt consolidation loan. In some last-resort cases, bankruptcy could be worth considering.  

The bottom line 

If you’re struggling with paying your credit card bills or other unsecured debt, a debt management plan might offer you the help you need to get back on track. DMPs lump your payments into a single payment and can help cut your interest rates while providing you a structured path toward financial freedom.^[1]  

However, it’s not for everyone. If you enroll in a debt management plan, you may have less access to credit, and your credit score might take an initial hit. Debt management plans also come at a cost, as most credit counselors charge a fee for their services.^[1]  

Debt management plan FAQ 

Still have questions about debt management plans? Some of these commonly asked questions may provide the answer. 

Do debt management plans hurt your credit? 

Signing up for a DMP doesn’t directly impact your credit score, but your credit might take a hit while you work on your debt management plan. You may need to close your credit card accounts, which could hurt your credit score by affecting your credit utilization, age of accounts, and credit mix.^[3] 

Is a debt management plan a good idea?

Debt management plans can be a good idea if you’re consistently paying down your priority loans (like a mortgage), but are struggling to keep up with your credit card debt. Using a DMP allows you to make smaller monthly payments to improve your cash flow while lowering your interest rate so debt stops mounting up so fast.^[3] 

What are the disadvantages of a debt management plan? 

Debt management plans may require an upfront and monthly fee, they won’t help you with secured debts, and they may require you to close your credit cards. There’s also no guarantee that creditors will agree to participate and you’ll have to trust that the credit counselor will pay your creditors on time.^[3]  

How long do debt management plans last? 

Most DMPs are intended to pay off the included debts within three to five years. You may have a fixed monthly payment during the repayment period. As you pay off one account, the counseling agency will take that money and apply it to the other outstanding accounts.^[2] 

What’s the best way to manage debt? 

Everyone’s situation and debt are different. If you want to pay off debt quickly, consider listing your debts and making a plan for which ones to tackle first. Sometimes using another resource, such as a DMP or debt consolidation loan, can be helpful.^[4] 

What does a debt management program do? 

Debt management programs may offer different approaches to paying off debts. Some are guidelines or strategies, such as the debt avalanche and debt snowball methods. Others require working with a third party, such as a credit counselor, or with a new creditor to consolidate and refinance your debt.^[3] 

What is the best way to manage debt? 

The best debt management program may depend on your financial circumstances and credit. Bankruptcy might be the best option for some, while others may benefit from a DMP or even from debt settlement. Or, if you’re able to qualify, a debt consolidation loan may be a good choice to consolidate high-interest credit card debt with one monthly payment—often at a lower interest rate.^[3] 

What’s the difference between a debt management plan and debt settlement program? 

Debt management plans are sometimes confused with debt settlement programs. DMPs are offered by credit counseling agencies and intended to give you breathing room while you pay back your debt. Debt settlement programs negotiate debt forgiveness—usually about 50% to 80%—and are often costly. Settlement often takes years while your accounts continue to accrue interest and fees and can even leave you at risk for creditor lawsuits and wage garnishment.^[3]    

1. Consumer Financial Protection Bureau. “What is credit counseling?” 

2. National Counsel On Aging. “What Is a Debt Management Plan?” 

3. Consumer Financial Protection Bureau. “What is the difference between credit counseling and debt settlement, debt consolidation, or credit repair?” 

4. Consumer Financial Protection Bureau. “How to reduce your debt”