What is a debt management plan?

By Gina Freeman

Reviewed by Kimberly Rotter

Sep 26, 2023

Read time: 6 min

Woman doing home finances and using mobile phone at home

Key takeaways:

  • A debt management plan is a voluntary program for paying off your debts in 3 to 5 years under the guidance of a credit counseling agency.

  • Debt management plans do not reduce the amount you owe.

  • The monthly payment in a DMP can be very high. Affordability is the main reason that many consumers don’t complete their DMP.

Every debt problem has a solution, and you'll soon find yours. The best solution depends on how much money you have for paying bills each month, whether you've fallen behind, and what your choices are when it comes to strategies that are appropriate for your situation.

Let's take a look at how debt management plans work and who they might be right for.

What is a debt management plan?

A debt management plan, or DMP, is a service offered by nonprofit credit counseling agencies. With a DMP, unsecured creditors (mainly credit card providers) and credit counselors work together to create a 3-5 year plan for you to pay off your debts. You make a monthly payment into the plan, and a credit counselor divides it among your creditors. 

Debt management plans aren't the only services a credit counseling agency offers—you may also get budgeting advice and coaching to guide your spending. 

Creditors may waive certain fees and lower your interest rate. They may also re-age your account. That means they add past-due amounts to your balance and consider your account current. Your credit card issuers want to be paid, and that's what motivates them to offer you some leeway. 

That doesn't mean it'll be easy. You'll have to hold up your end of the bargain, which means committing to a multi-year payoff plan that combines multiple debts. Even though each creditor might help you get a lower payment, the combined payment can be high, especially compared to credit card minimum payments that are too low to get rid of your debt within five years. There are other rules to follow, too. Generally, you aren't supposed to use credit cards while you're in the plan. Also, creditors can back out of the agreement if you miss a payment.

Benefits of a debt management plan

Nonprofit credit counseling agencies are funded by major credit card issuers. They typically already have agreements in place, so there may not be a lot of negotiating. Their objective is to make it easier for you to repay your debt in full, and that means temporarily giving you better terms.

Other potential benefits of a DMP include:

  • You usually have to close your credit cards, making it easier to get spending under control.

  • Making one combined monthly payment streamlines your finances.

  • Your credit score may improve if you were missing payments and the DMP helps you get caught up, or if your accounts are re-aged.

  • Credit counseling can help you manage your finances.

  • If your creditors reduce your interest rates, you could spend less on interest.

DMPs aren't right for everyone. The drawbacks can be significant:

  • Canceling your credit cards can make it hard to respond to a financial emergency.

  • Closing credit card accounts before the balance is paid off could harm your credit profile by increasing your credit utilization

  • You might not be able to afford the DMP payments.

  • DMPs don't reduce your balances. And there are setup and monthly fees. 

The Federal Trade Commission (FTC) says that the average success rate for DMPs is only around 21%. The low success rate is mainly because the required payments are often unaffordable. The National Consumer Law Center says that "only consumers with considerable disposable income left over each month are able to get out of debt through a DMP."

Is a debt management plan right for you?

A DMP might be right for you if your credit card interest rates are sky-high. Bringing them down could make your debt more affordable. And if you're a habitual overspender, working through a plan with a counselor might help you change that. A DMP could also be the right choice if you have fallen behind on your payments and your creditors are willing to bring your accounts current. 

On the other hand, to complete a DMP, you must be able to afford its payments, usually for several years. That's a big hurdle for many people. Affordability depends on how much your creditors are willing to knock off your interest rate. You'll also pay monthly fees for a DMP. The fees are anywhere from $8 to $79 per month. 

And there are other considerations. Do you have access to credit or savings in an emergency? Do you need credit cards for business travel? Are you trying to protect your good credit standing? Do you need help with budgeting and spending?

How to succeed with a debt management plan

If you go ahead with a DMP, follow these tips to increase your chances of success:

  • Create a budget that accounts for every cent you earn. 

  • Be realistic about what you can pay month after month for several years.

  • Determine what, if anything, you must give up to afford your plan every month. 

  • Commit to sticking with it for as long as it takes to pay off your balances.

  • Celebrate your wins (inexpensively!) as your debt decreases and your credit improves.

  • Set up automatic bill pay to make your plan deposits on time. If you miss a payment, your creditors might stop cooperating with the plan.

  • Cut yourself some slack if you hit a few bumps in the road—then recommit to your budget.

Debt management plans aren't designed for overwhelming debt. They mainly help people whose balances are high but affordable with a little help.

How to enroll in a debt management plan

Debt management plans come from credit counseling agencies, so your first step is finding a good one. Look for a reputable non-profit counselor who's accredited by the National Foundation for Credit Counseling (NFCC), a member of the Financial Counseling Association of America (FCAA), or approved by the U.S. Department of Justice.

Make an appointment for a free consultation online, in-person, or by phone. Your appointment will probably take about an hour. A counselor will check your credit and go over your financial situation to determine if you're a good candidate for a DMP. It may be helpful to assemble documents like pay stubs, bank and credit card statements. You should also list your regular expenses like food, gas, utilities, and other necessities. 

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Alternatives to a debt management plan

If your plan payments plus your other necessary expenses still exceed your income, you need another solution. Don't worry. You still have options, and they might be easier to pull off than a DMP. Consider these:

Consolidate debt

Consolidating your debts with a lower-interest loan might get you a more affordable payment than a DMP, especially if your credit is good. Home equity loans, especially, can be excellent for reducing your payments, because their interest rates are low and repayment terms are long. 

Negotiate debt

One downside of a DMP is that it doesn't reduce what you owe. You (or a reputable debt resolution service) may be able to negotiate a lower payoff with your creditors. Typically, you offer a lump sum to cover part of what you owe, and the creditor forgives the rest. You're more likely to succeed if you can show your creditors that you can't afford to repay the debt without their help.

File bankruptcy

Bankruptcy may reduce what you owe. With Chapter 7, you may have to give up property you own in exchange for being allowed to walk away from your unsecured debts. Not everyone qualifies for Chapter 7. If your income is too high, you may have to file Chapter 13. Chapter 13 is much like a DMP, in that you pay into a plan, and the plan pays your creditors. Unlike with a DMP, any remaining balance goes away after you've paid for a certain amount of time (three years if you're low-income, five years if not).

Gina Freeman - Author

Gina Freeman has been covering personal finance topics for over 20 years. She loves helping consumers understand tough topics and make confident decisions. Her professional history includes mortgage lending, credit scoring, taxes, and bankruptcy. Gina has a BS in financial management from the University of Nevada.

kim rotter 2022 2

Kimberly is Achieve’s senior editor. She is a financial counselor accredited by the Association for Financial Counseling & Planning Education®, and a mortgage expert for The Motley Fool. She owns and manages a 350-writer content agency.

Frequently asked questions

A debt management plan can be a good solution for some debt problems. One advantage is that DMPs usually include financial education and counseling. A DMP typically lowers your credit score in the short-term, but minimally. If you can’t afford the payments, a DMP won’t help you.

You can’t include student loan balances or secured debts like mortgages or auto loans in a DMP. DMPs are mainly for credit card debt, unsecured personal loans, and other unsecured accounts like medical charges.

Debt management plans can help or harm your credit score in the short term. Canceling credit cards while they still have a balance tends to drop credit scores. But bringing past-due accounts current and making on-time payments should improve your score, as will paying down your balances.

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