What Is a Debt Management Plan?

A Smart Path to Tackling Credit Card Debt

If you’re trying to stay on top of several credit card payments, late payments, and rising interest costs, you’re not alone, and you’re not out of options. In a report from the Federal Reserve, U.S. consumers have an average credit card balance of over $7,300, and total revolving debt exceeds $1 trillion. For millions of Americans, high-interest debt is not only high-stress; it’s suffocating.

That’s where a debt management plan (DMP) comes in. It’s an organized, professionally-led process to put you on a clear repayment plan with lower interest and more control. But what is a debt management plan and how is it different from loan consolidation or debt settlement?

In this guide, we’ll explain how debt management works, examine some of the benefits of enrolling in a debt management program, and help you decide if a DMP is the right way forward for achieving financial freedom.

What Is Debt Management?

Debt management includes any approach to help a borrower repay their debt in a more structured, manageable way.  Psychology might even play a role in managing borrowers to pay back their debt.  This can range from general budgeting advice to debt consolidation, to formal repayment programs.  The most common structured solution to a borrowing problem includes programs formally provided by non-profit credit counseling agencies.

Credit counseling agencies are responsible for working to negotiate acceptable terms for the borrower and then recognizing better interest rates from creditors while working on the reduction of late fees.  Those are major pluses toward being able to truly reposition themselves to manage their finances.

So, What Is a Debt Management Plan?

A debt management plan (DMP) is a formalized payment plan through a credit counseling agency to help you pay off unsecured debts, such as credit card balances, personal loans, and certain medical bills.

When you enter a DMP, the credit counselor negotiates with your creditors to:

• Lower your interest rates
• Waive or reduce the late fees charged
• Consolidate your payments into one monthly amount
• Establish a plan to repay your debts, typically over 3 to 5 years

It is important to understand that a debt management plan is not a loan. You will repay all that you owe – just on much better terms. The agreed upon repayment structure is an important distinction between a DMP and something like debt settlement where part of the debt is forgiven.

How Does a Debt Management Program Work?

Here’s what you can expect in a typical debt management program:

1. Free Credit Counseling Session

You will have a meeting with a certified counselor to analyze your finances and determine if you want to pursue a DMP.

2. Negotiation with Creditors

The counselor will reach out to your creditors about reducing your interest rates and monthly payments.

3. Single Monthly Payment

You will make your monthly payment to the counseling agency, who will then disburse the payment to your creditors.

4. Closure of Enrolled Accounts

To avoid taking on new debt, you will have to close your credit accounts enrolled in the plan.

5. Program Commitment

The DMP usually lasts 36-60 months, and you will make consistent payments until your debts are paid off.

Pros and Cons of Debt Management Plans

Pros

· Reduced Interest Rates

Creditors typically agree to drastically lower APRs—some to below 10%.

· Simplified Payments

Only have to track one single monthly payment, which means no juggling different due dates among creditors.

· Lower Fees

Since you are on a DMP, late fees and over-limit fees are often waived.

· No loan required

The key difference between a Debt Management program and a Debt Consolidation Loan is that you do not have any new debt, just a better way to repay existing balances.

· Credit score is likely to improve

As you make more payments on time and continue to pay down debt, your score will slowly come back.

Cons

· Accounts may be closed

All cards that are on a DMP will be closed so you can no longer use these accounts to impact your credit utilization ratio and score for a few months or years

· Necessary commitment

If you fall behind in your payments, the credit counseling agency can remove you from the DMP program and the creditor can increase your interest rate that was affected by the program.

· Fees and setup fees

Most agencies will charge you a small initial set-up fee and continue to have a monthly service fee (usually $25-$50 a month).

Does a Debt Management Plan Affect Your Credit Score?

Yes—but usually positively.

Initially, accounts closed as part of your debt management plan may reduce your credit utilization and lead to a temporary dip in your score. However, over time, your score will likely improve due to consistent on-time payments and a lower debt level.

It is common for participants to see a score increase anytime between 12-24 months into the debt management program.

Is a DMP Right for You?

A DMP could be the right choice for you if you are:

· Having trouble managing credit cards debt

· Will be able to make enough money to meet living expenses and pay on your debt, but are tired of high-interest payments

· Want to avoid bankruptcy or loan-based consolidation

· Need assistance to organize and automate your repayment.

However, if you have debts that include secured loans (like car or mortgage debt) or you plan on continuing to use credit cards, a DMP could be a less-than-ideal choice.

Alternatives to Debt Management

If a debt management program isn’t a good fit for you, consider the following options:

· Debt Consolidation Loan

With a debt consolidation loan, you combine your many debts into one debt consolidation loan (typically, a fixed-rate loan). This is best for those with good credit.

· Debt Settlement

With a debt settlement program, you have creditors that agree to take less than the full amount of your debts you owe them.

· Bankruptcy

A bankruptcy is legal proceeding that can wipe out some debts (but usually comes with a steep price for your credit).

· DIY Budget + Snowball Method

If your debts balances are very low, you can self-manage paying them off, as long as you have discipline.

Final Thoughts: Is Debt Management the Solution for You?

So, what is a debt management plan? It is a practical and proven solution for unaffordable unsecured debt – especially for those with larger amounts of credit card balances and rising interest rates. Nonprofit debt management programs provide structured repayment, lower or no fees, and the ability to start rebuilding your financial life.

If you are still wondering what debt management program, and whether or not it is right for you, the best way to understand debt management programs is to call a certified credit counseling agency and arrange for a free consultation. It is a free low-risk option for you to get clarity, and hopefully peace of mind, moving forward.