Debt Management Plan Definition & Meaning
Debt management plan summary:
If you work with a credit counseling agency, your counselor will help you create a debt management plan.
With a debt management plan, you’ll typically pay off debt over three to five years.
You make one monthly payment to the counseling agency and they distribute the money to your creditors.
What is a debt management plan?
A debt management plan is a structured plan to pay off debt, typically over three to five years. Debt management plans don't reduce the amount you have to repay, but they could make repayment easier by streamlining monthly payments.
You set up a debt management plan with the help of a credit counselor. You make one payment to the counseling agency each month. The credit counselor then distributes the payment among the creditors you enroll with the plan. You are typically required to close your credit card accounts as a condition of enrollment. Your creditors could periodically check your credit reports to make sure.
Key concept: A debt management plan could help you simplify your debt payoff.
More about debt management plans
A debt management plan is a debt payoff plan that's created with the help of a credit counselor. Debt management plans are designed to help people with unsecured debt, typically credit cards, repay what they owe over three to five years. These plans can streamline monthly payments, but they don't reduce the total amount you have to repay.
Key features of a debt management plan
Debt management plans offer a structured way to repay debt for people who may be struggling to manage multiple payments each month. The end goal of a debt management plan is to help you fully pay off all debts enrolled in the plan within a set time frame.
When you enroll, you agree to make one monthly payment to a credit counseling agency each month. The credit counselor then distributes that payment to your creditors. Your credit counselor may also negotiate with credit card companies to get them to lower your interest rate or waive certain fees.
Here are some key things to know about debt management plans.
You may need to have a minimum amount of debt to enroll in the plan.
Your creditors don't have to agree to the plan. If they do agree, they could pull out if you don’t hold up your end of the agreement. That includes making all payments on time, and avoiding using credit cards while you’re paying off your debt.
A debt management plan isn't a loan and you won't create new debt when you enroll.
You will probably be required to close your credit card accounts when you enroll.
The payment could be surprisingly high, especially if you’ve only been making minimum payments.
Debt management plans typically don't accept secured debts. A secured debt is attached to collateral or something of value. If you need help with these types of debts, you may need to seek a different solution.
Who is a debt management plan right for?
A debt management plan could make more sense for some people than others. You might consider enrollment if you:
Mostly have unsecured debts, like credit cards
Need help with a workable repayment plan that fits your budget
Need help controlling credit card spending
Would like to reduce the number of debt payments you make each month
Are okay with closing your credit cards if asked to as a condition of enrollment
Can afford a payment big enough to fully repay all of your unsecured debt in three to five years
Debt Management Plan FAQs
If you can't pay credit cards, student loans, or other debts on time, creditors or lenders can report late payments to the credit bureaus. Late payments usually have a negative impact on your credit profile. Eventually, debts might get sold to a collection agency.
It's a good idea to contact your creditors or have a conversation with a debt consultant if you think you're in danger of missing a payment. Creditors may offer financial hardship programs to give you temporary relief. A debt consultant could help you weigh other options to manage your debt.
Start by listing all debts with balances, interest rates, and minimum payments. Review your budget to calculate how much you can pay monthly beyond minimums. Choose snowball for quick wins, avalanche to minimize interest, or stacking for flexibility to change priorities as your situation evolves.
It doesn’t matter which plan you choose to start with. You have the right to change your mind at any time. The most critical step is to start. Getting rid of debt requires consistent effort. The sooner you start, the sooner you’ll make progress against those balances. Your plan can change and flex along the way as you figure out what works best for you.
If you can’t afford DIY methods, consult experts about professional options. Here are a few people you could talk to:
A debt expert can explain how debt settlement works. That’s when creditors agree to accept less than the full amount you owe but consider it payment in full.
A bankruptcy attorney licensed to practice in your area can explain Chapter 7 and Chapter 13 bankruptcy and how they might apply to you. Bankruptcy is legal protection from creditors and could result in debt forgiveness (called discharge).
An accredited credit counselor can give you information about debt management plans. In a DMP, you fully pay off your debts, typically at reduced interest rates, under the guidance of the credit counselor.
Gathering information from multiple sources is a great way to choose the path that best fits your situation.
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