Table of Contents
Table of Contents
What Is a Debt Management Plan?
Guide to Choosing a Debt Management Plan
Compare the Best Credit Counseling Companies
How to Get Started With a Debt Management Plan
FAQs
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Updated February 16, 2024
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Working with a non-profit credit counseling agency to create a debt management plan can be a worthwhile option if you're struggling with debt. However, just because an agency is non-profit doesn't mean it’s affordable or trustworthy.
Choosing the right debt management plan means considering factors like cost and reputation. Here's what you need to know about finding and comparing options.
What Is a Debt Management Plan?
A debt management plan (DMP) is a structured, voluntary agreement between you and a consumer credit counseling agency. The agency aims to help you pay off high unsecured debts like credit cards and medical bills by negotiating more favorable payoff plans with your creditors.
After (or while) negotiating on your behalf, your credit counselor creates your debt management plan. Under the plan, you make just one monthly payment to cover all your minimum payments plus the agency's fee. The agency distributes payments to each of your creditors based on the plan. DMPs may include reduced interest rates or waived fees.
The goal is to gradually pay off your debt within three to five years while minimizing interest and fees. By following a debt management plan, you avoid defaulting on your debts, eliminate collection calls, and avoid filing bankruptcy.
Guide to Choosing a Debt Management Plan
Look for a reputable credit counseling agency, ideally one that's accredited by an industry association like the National Foundation for Credit Counseling or the Financial Counseling Association of America.
You can narrow down your debt management plan options by reviewing credit counseling agency websites. Then, you can schedule free consultations with your top choices to find the best fit.
Factors to Consider When Choosing Debt Management Plans
Here are some key things to consider when you're choosing an organization.
- The types of debt you have: A debt management plan is best for dealing with unsecured debts like credit card balances, medical bills, and personal loans. If you have secured debts—tied to an asset, like a mortgage or auto loan—a debt management plan may not be the best option.
- Upfront and ongoing costs: You may have to pay an enrollment fee to get started with the debt management plan and a monthly fee for as long as you're enrolled.
- Impact to your credit score: Enrolling in a debt management plan requires you to close your credit cards, which can hurt your credit score. Over time, your credit score will recover as you reduce your balance and make your payments on time.
- Licenses and certifications: Verify whether the agency is licensed to operate in your state and check to see whether it belongs to an industry association like the National Foundation for Credit Counseling. Confirm whether the employees are also licensed or have other industry certifications, like HUD-certified housing counseling.
- How the debt management plan will help: A counselor should review your debts and your finances, explore options with you, and explain how a debt management plan can help you pay off your debts. Reduced interest rates and fees are possible in some cases, but aren't guaranteed.
A trustworthy company won't charge you upfront for services you haven't received.
Compare the Best Credit Counseling Companies
| Company | Accreditation and Memberships | Fees for Credit Counseling and Debt Management Plans |
|---|---|---|
| Apprisen | Member of the NFCC and FCAA; HUD-approved housing counseling | Free credit counseling. Initial fee: $0 to $45; Monthly fee: $0 to $45 |
| Cambridge Credit Counseling Corp | Member of the NFCC and FCAA; HUD-approved housing counseling | Free credit counseling. Average initial fee: $40; Average monthly fee: $30 |
| InCharge Debt Solutions | Member of the NFCC and FCAA; HUD-approved housing counseling | Free credit counseling. Average initial fee: $75; Average monthly fee: $33 |
| Money Management International | Member of the NFCC; HUD-approved housing counseling | Free credit counseling. Initial fee: $33; Monthly fee: $25, on average |
| American Consumer Credit Counseling | Member of the NFCC; HUD-approved housing counseling | Free credit counseling. Initial fee: $39; Monthly fee: $7 to $70 |
Different credit counseling companies have different certifications and specializations, along with different fees. Learn more about our picks for the best credit counseling companies and their debt management plans.
How to Get Started With a Debt Management Plan
After you've chosen a credit counseling agency, you'll work with a counselor to create a debt management plan.
- Schedule a consultation: During your consultation, you'll meet with a credit counselor to review your finances, including your income, expenses, and debts. Your counselor will help you create a budget and a debt management plan that balances creditor guidelines with what you can afford.
- Wait for the proposal approval: Based on your debt management plan, your counselor will send a proposal to your creditors requesting a lower monthly payment or a lower interest rate, or both.Late fees may be waived in some cases.
- Start making payments: Once your creditors have accepted the debt management plan proposal, you'll begin sending monthly payments to the credit counseling agency. The agency will then distribute payments to each of your creditors based on your plan.
To protect your credit score and avoid additional late fees, continue making your regular minimum payments until the proposal is accepted.
Debt Management Plans vs. Debt Settlement
Debt management plans and debt settlement are two different approaches to paying off unsecured debts. Debt settlement plans are often offered by for-profit companies, which negotiate a lump sum payment lower than your outstanding balance. By comparison, a debt management plan, usually offered by a non-profit organization, helps you pay off balances in their entirety, with affordable monthly payments.
One downside of debt settlement is that you're typically required to skip your regular bill payments and direct your funds into an escrow account instead. The funds in the escrow account will be used to negotiate the settlement. Missing payments and defaulting on your debts can harm your credit score and lead to collection calls and lawsuits. A debt management plan is designed to keep your accounts current and in good standing, as long as your payments are on time.
It's important to know that debt forgiven under a debt settlement plan is considered income by the IRS, and is taxable. Debt management plans don't have this concern.
Credit counseling is a good first step when you're faced with overwhelming debt, but if you're unable to make the required payments you may need to seek other forms of debt relief. If so, learn more about the best debt settlement companies, but be sure to compare debt settlement to bankruptcy before making a decision.
What Are the Alternatives to Debt Management Plans?
A debt management plan can be an effective way to pay off debt, but it's not for everyone. Here are some alternatives:
- Consolidate or refinance your debts with a debt consolidation/refinance loan. Combining your balances with a single loan can simplify your debt repayment. You can potentially lower the interest rate and monthly payment, making it easier to pay off your debt.
- Transfer balances to a low or 0% interest rate credit card. A credit card balance transfer can help you pay off debt faster and save money on interest, if you pay off the balance before the promotional rate ends.
- Consider debt settlement: Debt settlement allows you to pay off your debts for less than you owe, but it can be costly and has significant consequences for your credit.
- File bankruptcy. While bankruptcy is a serious decision that should be considered only as a last resort, it can provide relief from overwhelming debt. Keep in mind that not all debts can be discharged in bankruptcy and filing can damage your credit.
- Create your own debt repayment plan. Create and follow a budget to allocate money to pay off your debts, following either the avalanche method (highest interest-rate debt first) or the snowball method (lowest balance debt first).
Who Regulates Debt Management Companies?
The Federal Trade Commission regulates debt management companies. Your state attorney general has the authority to take legal action against companies that violate your rights, too. Additionally, the National Foundation for Credit Counseling and the Financial Counseling Association of America are industry associations that set guidelines for credit counseling agencies.
Can You Use a Credit Card While on a Debt Management Plan?
No, you usually can't use a personal credit card while you're on a debt management plan. Creditors generally agree to lower your interest rate or waive fees under the condition that you stop using your card. They may cancel the agreement if you open a new card or make new purchases on an existing one. In some cases, you may be allowed to keep one card open for emergencies.
How Long Does a Debt Management Plan Stay on Your Credit Reports?
When you enroll in a debt management plan, it won't appear as a separate account on your credit reports. Instead, while you're enrolled, the accounts that are included in the plan will have a note that they're managed by a financial counseling program or enrolled in a debt management plan. This doesn't have a direct impact on your credit scores, but lenders can see this information when you apply for credit.
Article Sources
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Internal Revenue Service. "Topic No. 431, Canceled Debt – Is It Taxable or Not?"
Related Terms
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Credit counseling provides guidance and support for consumer credit, money management, debt management, and budgeting.
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Debt Relief: What it Is, How it Works, FAQs
Debt relief involves the reorganization of a borrower's debts to make them easier to repay. It can also give creditors a chance to recoup at least a portion of what they are owed.
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Cancellation of Debt (COD): Definition, How It Works, How to Apply
Cancellation of debt (COD) occurs when a creditor relieves a debtor from a debt obligation. Canceled debts are often taxable as income.
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Debt Snowball: Overview, Pros and Cons, Application
A strategy for becoming debt-free, the debt snowball starts with paying off the smallest debt first and working up from there.
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