What Is a Debt Management Plan?
- A debt management plan (DMP) engages professional credit counseling services to help make your monthly payments on unsecured debts more manageable.
- There are often fees for DMPs, but they can be offset by savings on interest and waived fees from creditors.
- Your credit report may note that you are participating in a DMP, but this doesn’t have a direct impact on your credit score in the same way that other methods, such as debt settlement, do.
If you’re struggling to manage debt, it may be time to explore a debt management plan (DMP). A DMP is a tool offered by credit counselors to help borrowers pay off their debt, typically within three to five years. While a DMP can help reduce your debt and improve your credit, it may not be for everyone.
What is a debt management plan?
A debt management plan is a financial strategy to pay off unsecured debt, typically from credit cards, within three to five years. A credit counselor leads the process. DMPs are usually managed by nonprofit organizations. They help consumers better manage their debt in exchange for a startup fee and monthly service fees.
With a debt management plan, your credit counselor can negotiate with your creditors on your behalf to waive fees, decrease your interest rates or lower your monthly payments. This may make your bills more affordable and help you pay off debt faster.
While you’re in a DMP, you’ll provide payments to your credit counseling agency, which will then pay your creditors. Initially, you’ll be asked to close most or all of your credit cards, which could raise your credit utilization ratio. This can negatively impact your credit score.
However, as you repay your debt, your credit utilization ratio could decrease, your history of on-time payments should build and you may see a net improvement in your credit score as a result.
When you complete your DMP, your accounts will be paid off in full. This has a better impact on your credit than settling debts for less than the original amount due.
Debt management plan pros and cons
A DMP can be a helpful tool if you’re feeling overwhelmed by debt, but the pros and cons of debt management plans can depend on your financial situation.
Pros
- Should typically pay off debt within three to five years
- May reduce interest rates and waive fees from creditors
- Can help you build healthy financial habits with a professional
- Your credit score may increase as you pay off debt
Cons
- Typically can’t use credit cards while they’re being paid off in a DMP
- Generally won’t cover secured debt or student loans
- May see an initial reduction in credit score as credit utilization ratio increases
- May have to pay a startup fee and monthly fees to credit counseling agency
How to get a debt management plan
To get a debt management plan, you’ll need to enroll with a credit counseling agency. The U.S. Department of Justice provides a list of legitimate credit counseling agencies you can search through to find one in your area.
Once you begin credit counseling, you may need to have documents such as bank statements, credit card statements and other financial paperwork at the ready so the counselor can work with you to come up with a budget to pay off debt. Your credit counselor can then negotiate with your creditors to come up with a new repayment plan.
Credit counseling agency plans
Below are a few examples of credit counseling agencies that offer debt management plans. Many offer free initial counseling sessions.
Be sure to read any fine print before enrolling in a debt management plan, which generally comes with fees. These fees can sometimes be waived depending on your income level or military service history. You may also see lower fees depending on your state, as some cap the maximum charged.
| Agency | Areas serviced | Debt management plan fees |
|---|---|---|
| American Consumer Credit Counseling | All 50 states |
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| Apprisen | All 50 states |
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| Cambridge Credit Counseling Corp. | All 50 states |
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| GreenPath Financial Wellness | All 50 states |
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| Money Management International | All 50 states |
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Alternatives to debt management plans
If a DMP isn’t right for you, you can also consider the following financial strategies to tackle your debt.
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Repayment strategies: Instead of going to a credit counselor, you can use an aggressive approach on your own to cut down on debt. Here are two tactics:
- The debt avalanche method instructs consumers to pay off their debt starting with the account with the highest interest rate. This can save you money on interest.
- The debt snowball method focuses on paying down your smallest balances first. This method gives you quick wins, which may be more motivational, but it can cost you more in interest than the avalanche method.
- Debt consolidation: Debating credit counseling versus debt consolidation? A debt consolidation loan combines all your debt into a new, single personal loan. This option is helpful if you can secure a lower annual percentage rate (APR) than you’re currently paying.
- Debt settlement: Instead of using a credit counselor to negotiate your debt, you can use a debt settlement company to do so. However, these companies can come with hefty fees and often ask you to use strategies that hurt your credit history. It could even end up costing you more in the end. Keep in mind, you can negotiate with your creditors yourself, for free.
- Bankruptcy: In some cases, it may be best to wipe the slate clean. Bankruptcy allows consumers to discharge their debt through the legal system, though it can have real drawbacks. It will cost you in court and legal fees, and it will leave a severe mark on your credit report.
Frequently asked questions
One concern some consumers have is how credit counseling affects your credit score. A DMP won’t directly go onto your credit report, but the initial reduction in your available credit may result in a negative impact on your credit score. Over time, a DMP may be positive for your credit score as long as you make on-time payments and continue to lower the amount of debt you have.
One of the downsides of a DMP is that you may have to close any credit cards listed on your plan while you’re enrolled. So if you find yourself backed into a financial corner, you won’t be able to use your credit cards. If this is a concern, consider these other strategies to pay off credit card debt.
While certain debts may or may not be listed as a DMP plan on your credit report, this doesn’t have an impact on your score. However, on-time or late payments made while on a DMP may appear on your credit report. These line items can affect your credit score.
Yes, you can pay your DMP off early. You can do this by making extra payments or setting up your DMP on a biweekly schedule rather than a monthly one. Proceed with caution, though – if you get too aggressive with your repayment, you may not have enough of an emergency fund to handle rough months in the future. If this happens and you miss a payment, your DMP could be at risk.
While it’s not impossible to qualify for a mortgage while on a debt management plan, it may be challenging to find a lender that will approve you. You may be more likely to qualify for manually underwritten loans, such as FHA and VA mortgages, than conventional loans. While the DMP notation may cause lenders to look more closely at your application, line items such as on-time payments under a DMP send a positive signal.
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