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Debt Consolidation Programs: How Helpful Are They?

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In a Nutshell

Making late payments, paying the wrong amounts, or missing payments altogether can have a negative impact on your credit score and overall financial health. If you have no other debt-relief options, debt consolidation programs can help by bundling certain debts into a single account so that instead of making multiple payments every month, you’ll make just one. There are many kinds of debt consolidation programs. There are also other forms of debt relief that might be better for you. In this article, we’ll cover what a debt consolidation program is, how it works, and how to choose one.

Written by Natasha Wiebusch, J.D.
Updated October 19, 2021

Are you overwhelmed by debt? Having multiple payments and payment amounts every month can be very stressful. This is understandable. Making late payments, paying the wrong amounts, or missing payments altogether can have a negative impact on your credit score and overall financial health. If you have no other debt-relief options, debt consolidation programs (also called debt management plans) can help. These programs bundle certain debts into a single account so that instead of making multiple payments every month, you’ll make just one.

There are many kinds of debt consolidation programs. There are also other forms of debt relief that might be better for you. In this article, we’ll cover what a debt consolidation program is, how it works, and how to choose one.

What Is a Debt Management Plan? 

A debt management plan (DMP), or debt consolidation program, is a service by a credit counseling agency. It allows you to consolidate your debts into a single loan. Once consolidated, the credit counseling agency you’ve chosen will administer your account and handle the payments. You’ll make a single loan payment to the agency, which then disperses payments to your creditors.

Through a debt consolidation program, you can receive a lower interest rate and possibly even lower monthly payments. Though if you get a lower monthly payment, it may take you longer to pay off the debts that were bundled into the program. This may result in paying more interest in the long run. Even though you might spend more on interest overall, this type of repayment plan can help you stick with a budget and keep up with your payments. This means you’ll miss fewer payments and have more money on hand to pay for other expenses.

Although debt consolidation programs can be very helpful, it’s important to know that they will be reported to the credit bureaus and added to your credit report. Your credit report is used to calculate your credit score. Unfortunately, a debt consolidation program is seen as a negative item in your credit history, and it can lower your credit score.

Debt Management Plans vs. Debt Consolidation Loans

Although similar, debt management plans and debt consolidation loans are two different methods of consolidating debt. Mainly, debt consolidation loans are personal loans negotiated directly between a borrower and a lender, like a bank. This means your credit score will play a role in what you can qualify for. With a debt management plan, a debt counseling agency negotiates new terms for the debt. Your credit score is less important with a DMP since it’s not a loan.

Both involve fees. When you apply for a debt consolidation loan, your bank will usually charge you an origination fee to process your loan application. Debt management plans, on the other hand, typically charge administration fees. Both also typically only work with unsecured debt, such as credit card debts, car loans, payday loans, or unpaid medical bills. Secured debt like a mortgage or auto loan isn’t eligible because it’s backed by property. If you default, the lender can take back the property to address your outstanding debt.

How Do Debt Management Plans Work? 

A debt consolidation program is typically administered by a nonprofit credit counseling agency. The credit counseling agency will generally negotiate new terms that allow a borrower to pay off their bundled debt within a specified period of time, usually 3-5 years. 

Below are the typical steps involved in creating a personalized debt consolidation program through a credit counseling agency:

Credit Counseling   

The first step in creating a debt management plan is to attend credit counseling with a licensed credit counselor. During this meeting, which is typically free, you’ll need to share the details of your financial situation with the credit counselor to determine what steps make the most sense for your situation.

Once you’ve completed the credit counseling appointment, you’ll likely have to pay a setup fee as well as monthly payments. These administration fees pay for the management of the plan. The amount will vary from agency to agency and state to state. You might be able to have these fees waived if you qualify for a waiver.

When looking for a credit counseling agency to establish your debt consolidation program with, make sure that they are an accredited, nonprofit credit counseling agency. You’ll want to confirm this because scams are common among debt relief programs. Scammers posing as credit counseling agencies may try to get your personal information. Private debt relief companies may also try to take advantage of you.

Since fees and services vary, take your time when deciding which agency is best for you. Make comparisons between different programs and weigh the pros and cons of each agency. To help, create a sheet where you can list what each agency charges, what kinds of fees they have, and what services they offer.

Setting Up a Personalized Plan

Once you choose a debt counseling agency and you’ve attended your credit counseling appointment, you’ll have to set up a personalized plan.

To do this, the debt counseling agency will communicate with your lenders and creditors to negotiate repayment terms. No creditor is required to participate in a debt consolidation program but most will if an accredited, nonprofit agency is managing the plan. Once the credit counselor who’s managing your plan hears back from your creditors and lenders, they will communicate the repayment terms of the plan to you as the plan is finalized. 

Once the program is in place you generally shouldn’t take out a new loan or move your debt around. If you do this, you could risk losing the terms that were negotiated by the credit counselor on your behalf.


Once the debt consolidation program is in place, the next step is to begin making monthly payments to the credit counseling agency. They will then distribute the total sum you provided among your creditors/lenders.

Ideally, through a debt management plan, you’ll pay less each month on your loans. At the same time, a larger portion of that payment goes toward debt reduction and less goes toward the interest on your debt. You may even see a reduction in penalty fees, which will also help you reduce your overall debt faster.

One of the most important advantages of a debt consolidation program is that it lumps multiple payments into one. With a single debt payment, you’ll be less likely to miss payments or get confused about how much is due on which debt account. You’ll also be less likely to get hit with late fees.

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Consolidating Secured Debt

If you want to consolidate your debt, you may be tempted to bundle ALL of your debt together. In reality, not every kind of debt can be bundled into a debt consolidation program. Usually only unsecured debts — except for student loans — can be consolidated.

Although you may still want to consolidate your debt into a secured loan, sometimes that’s not the best approach. Consolidating unsecured debt into a secured loan puts your belongings at risk of repossession or your home at risk for foreclosure. For example, if you consolidate your credit card debt using the equity in your home, you’ll likely increase your mortgage payments. If you can’t make your mortgage payments, you can lose your home.

Before consolidating all of your debt, consult a financial professional, like a credit counselor. They can help you determine what your options are given the type and amount of debt you have and your credit history. They can also help you weigh the risks and rewards of the many different methods of debt relief. You can also use a debt consolidation calculator to help you decide if this is a good option.

Choosing the Right Program for Your Situation

As you’re deciding which debt consolidation programs to use, remember that not all programs are equal. Some are better than others. So before choosing your program, gather as much information as possible about the provider’s qualifications. You may discover that the provider you were planning on signing up with is not as reputable as you’d like.

Make Sure the Credit Counseling Agency Is Legitimate

While you’re shopping for a provider, check to see whether the credit counseling agency is an accredited nonprofit. If you’re not sure, you can search the agency’s name using the IRS’s Tax Exempt Organization Search Tool. You’ll also want to make sure that the agency has been approved by the United States trustee (11 USC § 111). You can see a list of approved credit counseling agencies from the Department of Justice.

Another good way to make sure the credit counseling agency is legitimate is by checking to see if they’re a member of the National Foundation for Credit Counseling (NFCC). Members of the NFCC are vetted and must meet certain requirements. For example, they must be a tax-exempt nonprofit, act in compliance with all applicable state and federal laws, be accredited through the Council on Accreditation (COA) or the Independent Standards Organization (ISO), and comply with the NFCC’s Member Quality Standards.

Check To See if They Have an Office Close to You

Although you’ll likely have many options in your state, the agency may not have an office nearby or that’s accessible by public transportation. They may offer to counsel you over the phone, but it will be up to you to decide if this is acceptable or if you need to be able to meet with them in person.

Write Down What Administration Fees They’ll Charge

As you’re considering your options, write down what administration fees each provider will charge to manage your debt consolidation program. In most cases, they’ll charge more than one fee. Once you’ve shopped around and you’re comfortable with your options, compare the fees so that you understand how much each program will cost.

Schedule Multiple Free Credit Counseling Sessions

You can also schedule multiple free credit counseling sessions with different providers. These will help you get to know the provider and give you a sense of what working with them will be like. Most importantly, the counseling services can help you make the best possible decision for your circumstances, which may or may not include establishing a debt management plan.

Contact Your Lender

Lastly, it’s always helpful to contact your current lender or creditor to discuss your options. Even if they aren’t interested in pursuing a debt management plan with you, they may be willing to explore other options.

Options Other Than Debt Management Plans

Of all the available debt relief programs, debt management plans should be a last resort. Although they help provide debt relief, they will remain on your credit report for seven years. This will negatively impact your credit score. A bad credit score can make it more difficult to get new loans. And if you are approved for a new loan, a bad score can prevent you from qualifying for good loan terms.

Other options you may consider include:  

  • Debt Settlement: In a debt settlement or debt settlement program, you negotiate with your lender to pay less than the total loan amount you owe. Even so, they consider your settlement payment as payment in full. You can either negotiate a debt settlement program on your own or hire a debt settlement company. But be cautious of debt settlement companies. Unlike credit counseling agencies, they’re usually for-profit companies. Even if they lower your loan amount, they may charge so many fees that you still end up paying more.

  • Credit Card Balance Transfer: If your lender is a credit card company, they may offer to consolidate your credit card debt onto one new low-interest-rate card called a balance transfer credit card. This typically involves a fee, and the lower interest rate usually only lasts a year. Still, combining all your credit card bills into one single payment can help you manage your payments. And having an interest-free period may help you get ahead of your debt.

  • Refinancing or a Debt Consolidation Loan: You may be able to refinance your debt at a lower interest rate with your lender through a personal loan. Or they may offer you a debt consolidation loan. In either case, you’ll have to pay an origination fee, but you’ll be able to pay a single monthly payment toward your new loan.

  • Bankruptcy: If your debt is becoming too overwhelming, you may also consider filing for bankruptcy. There are two main types of individual bankruptcy: Chapter 7 and Chapter 13. Each has its pros and cons depending on the circumstances.

Let’s Summarize...

Debt consolidation programs are just one way to create an effective debt repayment plan. Not only are there many credit counseling agencies that can help create a program for you, but there are also other options available to you.

If you’re considering establishing a program, remember that although useful, it will have a negative impact on your credit score. Be sure to discuss other options with your credit counselor and don’t be afraid to reach out to your bank or lender to see if they have options that can help you better manage the debt, such as refinancing or debt settlement.

Written By:

Natasha Wiebusch, J.D.


Natasha started her career as a lawyer representing labor unions and other investors in multi-state class action lawsuits. Passionate about the civil rights elements of her cases, she moved into practicing employment law to represent employees against discrimination of various ki... read more about Natasha Wiebusch, J.D.

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