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
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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 extensive knowledge in debt management and personal finance. My expertise is grounded in practical experience, having worked with individuals to navigate and successfully implement debt management plans. Additionally, I've closely followed developments in the field, staying abreast of the latest information and best practices.
Now, let's delve into the key concepts outlined in the provided article on debt management plans:
Debt Management Plans (DMPs): Debt management plans are strategies for repaying outstanding balances, typically facilitated by nonprofit credit counseling agencies. The primary goal is to help individuals become debt-free within a specified period, often five years or less. DMPs involve working with a credit counselor who negotiates with creditors to potentially reduce interest rates, lower monthly payments, or waive late fees.
Enrollment and Maintenance Fees: Participating in a debt management plan may involve enrollment and maintenance fees. These fees vary among credit counseling agencies and can impact the overall cost of the plan. It's essential for individuals considering a DMP to be aware of these fees and factor them into their financial planning.
Payment Process in DMPs: Under a debt management plan, individuals make a single monthly payment to the credit counseling agency, which then distributes the funds to creditors based on an agreed-upon schedule. This streamlined payment process simplifies financial management for participants.
Pros and Cons of DMPs:
-
Pros:
- Potential to become debt-free within five years.
- Simplification of payments with just one monthly payment.
- Potential improvement in credit score over time.
-
Cons:
- Loss of access to credit cards during the plan.
- Restrictions on obtaining new lines of credit.
- Not all creditors may agree to participate.
Credit Counseling Agencies: The article mentions three nonprofit credit counseling agencies that offer debt management plans: American Consumer Credit Counseling, Consumer Credit Counseling Service (CCCS), and Navicore Solutions. It's emphasized to verify the legitimacy of credit counseling agencies and check for nonprofit status.
Alternatives to DMPs: The article suggests alternatives to debt management plans, such as debt consolidation, debt settlement, and bankruptcy. These alternatives cater to different financial situations and needs, and individuals are advised to explore them based on their specific circ*mstances.
Setting Up a DMP: While individuals can set up their debt management plans, working with a credit counseling agency is recommended for professional guidance. Some charities may offer this service for free, but it's crucial to be cautious of potential scams and ensure the legitimacy of the service provider.
Including Debts in DMP: Not all debts qualify for inclusion in a debt management plan. Secured debts like mortgages are typically excluded, but unsecured debts, such as most credit cards, are eligible. The article suggests aiming to include all qualifying debts in a DMP.
In conclusion, debt management plans can be effective tools for debt repayment, but individuals should carefully consider their financial situation and explore alternatives before committing to a specific strategy. It's essential to work with reputable credit counseling agencies and stay informed about the terms and conditions of the chosen debt management plan.
