Debt Management Plans: What You Need to Know 

What Is a Debt Management Plan? 

A debt management plan is a structured program that brings multiple unsecured debts together into one payment. Unsecured debts any debt that isn’t backed up by collateral such as your home or car. DMPs are typically managed by credit counseling agencies, which are often (although not always) non-profit organizations, and take three to five years to complete. These programs can make it easier to pay off your debts as the process is simplified — you only make one payment per month rather than several — and you often pay less overall than you would without using a DMP. 

How Does a Debt Management Plan Work? 

When you enroll on a DMP, the credit counseling agency will try to arrange agreements with your creditors so that you pay less interest on your debts. For example, the agency may be able to negotiate a reduction from a 22% interest rate on a debt to 10%, meaning you’ll pay much less overall. The credit counseling agency will also attempt to have charges such as late payment fees waived, further reducing the debt. 

When the arrangements with your creditors are in place, a monthly payment schedule between you and the agency will be drawn up. Once you’ve signed the agreement, you make the payments every month to the credit counseling agency, which then pays your creditors. You’ll usually pay a one-off setup fee to the agency, plus a small monthly maintenance fee. Beware of agencies that charge extra fees on top.  

Debt Management Plans: Advantages and Disadvantages 

There are many potential benefits of using a debt management plan to handle your debt, but there are downsides too. If you’re considering enrolling in a DMP, make sure to do your research and carefully consider all the options before making a decision. 

Advantages of Enrolling in a DMP 

Some of the potential pros of enrolling in a DMP to manage your debt include: 

• Advice and support from professionals: Your chosen credit counseling agency will provide help tailored to your situation and negotiate with creditors on your behalf. 

• Lower payments and reduced fees: The agreement between your credit counseling agency and your creditors is likely to include lower interest rates and fees, so you'll pay less overall. 

• Easier to handle payments: Combining debts into one payment makes them simpler to deal with and less daunting, as well as less expensive. 

• Fewer collection calls: Your creditors deal directly with your credit counseling agency, meaning fewer debt collection letters, phone calls, and door visits for you. This can take a lot of the stress out of large debts. 

• Improved credit rating: When you make regular DMP payments on time, this will have a positive impact on your credit score and can help to reestablish a good credit history. 

Disadvantages of Enrolling in a DMP 

Some of the potential cons of using a DMP to pay off your debt include: 

• Not all debts are eligible: DMPs are usually only applicable to unsecured debts, such as credit cards and personal loans.  

• Potential fees: Credit counseling agencies aren’t free to use. They typically charge for consultations, for setting up DMPs, plus a monthly charge. Some agencies charge more fees, so always check before signing any agreements.  

• Limited access to credit: The terms of a DMP often prohibit taking on any more debt, including using existing lines of credit. This means you won’t be able to use your current credit cards or take out any loans. Some DMPs allow the use of a single credit card for emergencies. 

• Long term commitment: DMPs last for around three to five years and must be completed in full to reap the benefits. If you quit part way through, you’ll lose access to the beneficial terms negotiated by the credit counseling agency. 

• No guarantees: Creditors are not obligated to accept your DMP, so you could end up still having to pay them separately. It may also not be possible to negotiate significantly reduced rates or fees.  

Advantages	Disadvantages
Advice and Support from Professionals: Credit counseling agencies provide tailored help and negotiate with creditors on your behalf.	Not All Debts Are Eligible: DMPs typically apply only to unsecured debts like credit cards and personal loans.
Lower Payments and Reduced Fees: Agreements often include lower interest rates and fees, reducing overall costs.	Potential Fees: Credit counseling agencies charge for consultations, setup, and monthly maintenance, which vary by agency.
Easier to Handle Payments: Consolidates debts into one payment, making them simpler to manage and less intimidating.	Limited Access to Credit: DMP terms usually prohibit using existing credit cards or taking on new debt.
Fewer Collection Calls: Creditors communicate directly with the agency, reducing collection letters, phone calls, and visits.	Long-Term Commitment: DMPs typically last 3–5 years and must be completed to retain the negotiated benefits.
Improved Credit Rating: Regular on-time DMP payments can positively impact your credit score and reestablish credit history.	No Guarantees: Creditors are not required to accept the DMP, and it may not result in significantly reduced rates or fees.

Table: Advantages and disadvantages of enrolling in a DMP 

When Should You Consider a Debt Management Plan? 

Consider a  DMP if you have a lot of unsecured debts and are finding it difficult to cope with them. DMPs are an excellent way to take some of the stress out of paying off your debts, as well as reduce the overall amount you’ll pay. However, DMPs do require a commitment of three to five years, so if this doesn’t work for you another route might be a better choice. Always investigate all your options before taking big financial decisions. 

How to Start a Debt Management Plan 

If you decide that a debt management plan is the best route for you, it’s time to find a credit counseling agency that suits you. Make sure to compare several agencies to find the one that suits you best. Always choose an agency whose counselors are certified with a reputable organization such as the Financial Counseling Association of America (FCAA) or the National Foundation for Credit Counseling (NFCC).  

Many counselors offer free consultations so you can get an idea of their practice before you commit. It’s a good idea to have a full breakdown of your income and outgoings to hand — pay slips, bank statements, bills, and debts — to get the most out of these consultations. 

Once you’ve chosen a counselor, the process will go like this: 

1. Initial interview: You and your counselor will go through your complete income and expenses, so make sure to bring all the relevant documents with you and be prepared to discuss your finances in detail. Your counselor will also check your current credit rating and may also make recommendations on how you can budget more effectively. Once your counselor has all the information they need, they will either recommend that you enroll in a debt management plan or take some other kind of action. 

2. Negotiate with creditors: Once you’ve agreed to enroll in a debt management plan, your counselor will come up with a proposal for your creditors, based on the financial information you shared. This will include monthly payments, interest rates, fees, and how long it will take to pay the debt. The creditors can either accept the proposal, refuse it, or make a counteroffer. Once the details are settled, your counselor will draw up an agreement for you to sign. 

3. Sign agreement: Next, you’ll read the proposed agreement and sign it if you are happy to continue. Once signed, the program begins. You’ll receive a copy of the agreement by email or post. You’ll also provide your bank details so that the monthly payments can be taken from your bank account automatically. 

4. Pay monthly: The agreed amount will be deducted from your bank account every month, and payments will be made to your creditors. When a debt is paid in full, the payment stays the same, meaning more of the payment goes toward the remaining debts. 

What Are the Alternatives to Debt Management Plans? 

Although debt management plans can be an effective way to handle debt, they’re not for everyone. It’s important to weigh up the pros and cons according to your individual situation when deciding what approach to take with your debt. Let’s take a brief look at some other debt management options. 

Do-It-Yourself Debt Repayment Plans 

Managing your own debt repayment plan can help you save money on fees and is a smart choice if you can motivate yourself without the need for a third party to get involved. Two popular options are described below.  

Debt Snowball Method 

With the debt snowball method, you organize your debts by the amount owed and focus on paying off the smallest debts first. This method is a good choice if you are motivated by small wins and like to see immediate results. 

Debt Avalanche Method 

With the debt avalanche method, you organize your debts by how much interest you pay on them then focus on paying of those with the highest interest rates first. This method could work for you if you don’t mind waiting to see results and aren’t easily demotivated.  

Balance Transfer 

One way to save money on interest is by moving a debt from one creditor to another. This involved paying off the balance of a debt with a new line of credit with a lower interest rate, usually a credit card or personal loan. It is crucial to carefully check the terms of any new line of credit for transfer fees, hidden charges, and interest rate increases. 

Debt Consolidation Loan 

A debt consolidation loan (link) is like a DMP in that it brings all your eligible debts together into one monthly payment, which can often be lower than dealing with the debts separately. However, a debt consolidation loan incurs interest, while a DMP does not. You will also need to qualify for the loan. Taking out a debt consolidation loan can affect your credit score positively or negatively, depending on your circumstances and how well you keep up with the monthly payments.  

Debt Settlement  

Debt settlement involves hiring a debt settlement company to negotiate with your creditors and try to get them to accept a reduced repayment. It is an option for those who can’t or don’t want to use a DMP, debt consolidation loan, or bankruptcy, but it is a last resort as it can have a long-lasting negative effect on your credit rating. It’s particularly important to research debt settlement companies carefully as some charge high fees, and there are unethical operators out there. 

Bankruptcy 

Bankruptcy is a last resort for when you are unable to pay your debts. It is a legal process that takes place in federal court, where a judge decides how you can move forward. This may involve liquidating any assets you have to pay creditors, or the debt may be discharged if you have no way to pay. 

Is a Debt Management Plan Right for You? 

Debt management plans are a way to bring your unsecured debts together into one monthly payment, made to the credit counseling agency handling your plan. As well as making the debt repayment process simpler and less stressful, DMPs can also help you pay off debts faster and pay less overall. 

If you have unsecured debts across several lines of credit and can commit to a three-to-five-year repayment process, you may benefit from enrolling on a debt management plan. You should be prepared for your debt management counselor to investigate your finances thoroughly and be aware that you will not be able to get any more credit until the DMP is completed.  

There is no one-size-fits-all way to get out of debt. What suits your situation might not be what works for someone else. If a debt managment plan isn't for you, alternatives include debt consolidation loans, DIY repayment plans, and bankruptcy. Each has its pros and cons, so make sure to check out all your options before committing to a debt repayment route.