What Is a Debt Management Plan?

A debt management plan (DMP) is a way to help individuals pay off their debts by working with a nonprofit credit counseling agency. This plan allows you to become debt-free within five years or less and receive assistance managing your finances. However, DMPs are only suitable for some, and there are potential downsides, such as restrictions on taking out new credit during the repayment period.

Key Takeaways

• Debt management plans (DMPs) help you repay your debt in five years or less.
• You must work with a nonprofit credit counseling agency to set up a DMP.
• Participating in a DMP may require paying enrollment and maintenance fees.
• DMPs are only for unsecured debts, like most credit cards.

What Is a Debt Management Plan?

When you enroll in a debt management plan, a nonprofit credit counseling agency will work with you to negotiate with your creditors. Your counselor will contact your creditors to discuss their participation in the plan. The counselor’s role is to act as an intermediary, helping to reduce your interest rates and monthly payments or even waive late fees. They will also assist you in creating a budget, helping you reduce your expenses and manage your finances more effectively.

The agency’s responsibility is to ensure that your payments are distributed to your creditors according to the agreed-upon payment schedule, and they will provide you with regular updates on the status of your plan.

Instead of paying your creditors directly, you will pay the credit counseling agency monthly. The agency will then distribute this payment to your creditors according to the agreed-upon payment schedule.

DMPs require consistent monthly payments, generally lasting between three to five years. During this period, you must agree not to take on any new credit, and you’ll likely need to close the credit cards included in the plan. Once you complete the DMP, all your enrolled accounts will be paid off and debt-free.

The Pros and Cons of Debt Management Plans

Pros

• Debt-free within five years: A DMP ensures you pay off your debts within a reasonable timeframe, typically five years or less.
• Simplified payments: Rather than juggling multiple payments and due dates, you only make one monthly payment to the credit counseling agency, making money management more effortless.
• Credit score improvement: Your credit score may improve as you consistently make payments.

Cons

• No access to credit cards: To prevent further debt accumulation, most credit counseling agencies will require you to stop using or even close your credit cards.
• No new credit lines: While in a DMP, you generally cannot open new lines of credit, such as auto loans or personal loans.
• Some creditors may not participate: Not all creditors are willing to engage in a DMP. Additionally, student loans and secured debts are typically excluded from DMPs.

3 Credit Counseling Agencies to Consider

Many nonprofit credit counseling agencies offer debt management plans, though they often charge enrollment and maintenance fees. Some agencies may waive these fees under certain conditions. Here are three to consider:

Make sure to verify the credibility of any agency you’re considering by checking with your state attorney general or consumer protection agency. The United States Trustee Program also maintains a list of approved credit counseling agencies to help you find a legitimate service.

Alternatives to Debt Management Plans

Although DMPs can be a valuable tool for repaying unsecured debts, there might be better solutions. DMPs generally exclude student loans and secured debts, and some credit counseling agencies may limit how much debt you can include in the plan. Here are some alternative strategies:

Debt Consolidation

With debt consolidation, you use a loan to pay off all your existing debts. This approach can simplify your payments and lower your interest rate, helping you repay your debt more efficiently with fixed monthly payments.

Debt Settlement

Debt settlement involves negotiating with creditors to settle your debt for a smaller amount. However, this method is risky as it typically requires you to stop making payments for a period, damaging your credit score and increasing your financial risk.

Bankruptcy

If your debt is overwhelming and you can’t afford to repay it, bankruptcy may be an option. However, filing for bankruptcy will have long-lasting negative consequences on your credit report, typically remaining there for seven to ten years, depending on the type of bankruptcy filed. This will make it difficult for you to obtain credit in the future.

What Is the Purpose of a Debt Management Plan?

A debt management plan aims to simplify the debt repayment process by allowing you to make a single payment to a credit counseling agency, which then distributes the funds to your creditors according to a prearranged schedule. DMPs typically take three to five years to complete, and consistent monthly payments are required during that time.

Can I Set Up a DMP Myself?

Yes, you can create your debt management plan. However, if you do this independently, you will be responsible for managing your payments and ensuring all creditors are paid on time. While some debt management companies charge fees, specific charitable organizations offer free DMP services.

Should I Include All Debts in a Debt Management Plan?

You can include most debts in a DMP, but none qualify. Mortgages and secured debts are typically excluded from debt management plans. However, including as much of your qualifying debt as possible makes sense to streamline the repayment process.

The Bottom Line

By working with a nonprofit credit counseling agency, debt management plans can help you become debt-free in five years or less. While some enrollment and maintenance fees may exist, DMPs, such as credit cards, are only designed for unsecured debt. A DMP can help you get out of debt faster and improve your financial health by simplifying your repayment schedule.

If you decide a DMP isn’t the right fit for you, consider alternatives like debt consolidation, debt settlement, or even bankruptcy, depending on your situation. If you are unsure of which approach to take, consulting with a nonprofit credit counseling agency for guidance tailored to your needs is crucial for making informed financial decisions and feeling reassured about your financial future.