What Is a Debt Management Plan?
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A debt management plan allows you to combine your debts and make one monthly payment with a lower interest rate. It's set up by a credit counselor and usually takes 3-5 years to complete. Only certain kinds of debt, such as credit card debt, can be included in a DMP. If you have a lot of debt that's secured by collateral (like a house or car loan), a DMP may not be the best option. But you can look into other debt relief options including filing Chapter 13 bankruptcy.
Written by the Upsolve Team. Legally reviewed by Attorney Paige Hooper
Updated August 1, 2024
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Debt Management Plan: Definition
A debt management plan (DMP) is a strategy used to help people pay off their debts in a more doable way. In a DMP, a credit counselor helps you consolidate your debts into one monthly payment. This makes debt repayment easier to manage. It often also results in reduced interest rates and waived fees, lowering your overall debt. Completing a DMP usually takes 3–5 years and requires consistent, timely payments.
How Do You Set Up a Debt Management Plan?
If you’re interested in setting up a DMP, start by scheduling a free counseling session at a nonprofit credit counseling agency. An NFCC-accredited credit counselor can give you guidance on managing your debt, creating a budget, and improving your credit to help you find financial stability and become debt-free.
They can also tell you about other common debt relief options, including:
Most credit counseling agencies also have a debt management program. So, if you choose to use a DMP to manage your debt, you may be able to have the same agency set up and oversee the plan for a small fee.
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How Do Debt Management Plans Work?
When you sign up for a debt management program, the credit counseling agency you’re working with will reach out to your creditors to negotiate a payment plan that works for you.
Often, they’ll be able to negotiate lower interest rates as well. This is especially helpful if you have high-interest credit card debt. It decreases the amount you have to pay in the long run, and it results in a lower monthly payment.
A DMP doesn’t reduce your debt balance(s). Instead, the goal is to make it easier to pay off those balances, usually by lowering your interest rate. This allows you to pay over a longer time, while reducing the number of payments and deadlines you need to remember.
Once the plan is in place, you’ll make one monthly payment to your plan administrator (usually a credit counselor). They then pass the funds along to your creditors based on the new agreement.
This means you won’t have to worry about juggling due dates and keeping up with minimum payments on multiple accounts. As long as you’re current on your DMP payments, you won’t have to deal with late fees, collection calls, or most of the other stress that overwhelming debt can bring into your life.
How Long Does a DMP Take?
According to the National Foundation for Credit Counseling (NFCC), paying off a debt management plan typically takes 3–5 years. That said, there’s no standard plan length. Each debt management plan is tailored to the participant’s specific debts and income.
How Much Do DMPs Cost?
If you speak with a nonprofit credit counselor, your initial 30–60 minute session will be free. But you can expect to pay a setup fee and a small monthly fee for the debt management program services.
Fees vary depending on the agency you use and the amount of total debt included in your DMP. Don’t worry, though. A reputable credit counseling agency will always tell you exactly what you can expect to pay in fees before they do any work.
Some for-profit debt management companies may offer similar services, but they’ll often cost significantly more than working with a nonprofit organization. Before you agree to work with anyone, make sure you’re aware of all the costs and fees involved, what your expected monthly debt payment will be, and how long the plan is expected to take.
If something feels off, trust your gut. And educate yourself about the common red flags of debt relief scams.
What Debts Can Be Included in a Debt Management Plan?
Debt management plans tend to be good for folks who have a lot of high-interest credit card debt. Most types of unsecured debts can also be included in the plan.
Unsecured debts are any debts that aren’t backed by collateral. The most common types of unsecured debt are:
Credit card debt (including debts sent to collections)
Medical bills
Personal loans
Payday loans
Each creditor must agree to the DMP and the new repayment terms. Often, major credit card companies, lenders, and debt collectors already have relationships with agencies administering DMPs. So, the credit counseling agency may know in advance whether the creditor is likely to agree. With other types of debt, such as medical bills and payday loans, the creditor may or may not agree to work with the agency.
What Debts Can’t Be Included in a DMP?
You can’t include car loans or home loans/mortgages in your plan. These are called secured debts because they are backed (or “secured”) by collateral. If you’re struggling to repay a secured debt, the best course of action is typically to call the lender, tell them you’re experiencing financial hardship, and ask if they have any programs or options that can help.
It’s also important to know that not all unsecured debts can be included in a DMP. For example, student loans generally can’t be included. If you’re struggling to repay federal student loans, you can check to see which federal repayment plans you’re eligible for or explore Chapter 7 bankruptcy to eliminate your student debt for good.
How Is Debt Management Different From Other Debt Relief Options?
Debt management, debt settlement, and debt consolidation are three different debt relief options. Given how similar their names sound, it’s easy to get confused about what each one offers.
Here’s a quick rundown of how debt management plans compare to debt consolidation and debt settlement.
Debt Consolidation vs. Debt Management Plan: Which Is Better?
Debt management plans are a type of debt consolidation. When people talk about debt consolidation, they usually mean a debt consolidation loan.
One big difference between a debt management plan and a debt consolidation loan is that a DMP isn’t a loan, so it’s easier to qualify for a DMP. That’s good news if you have a few dings on your credit report.
Like a DMP, a debt consolidation loan rolls multiple accounts into a single monthly payment. Both options ideally allow you to lower your monthly payments and save money by reducing your interest rate.
One downside of a DMP compared to debt consolidation is that you usually have to close your credit card accounts with a DMP, which can lower your credit score in the short term.
What Is a Debt Consolidation Loan?
Here are the two common types of debt consolidation loans:
Credit card balance transfer: Doing a balance transfer allows you to move and combine several high-interest credit card balances into one lower-interest card. Many cards designed for this offer an introductory period with low or no interest.
Personal loan: This could be a secured or unsecured loan that serves as a debt consolidation loan. Basically, you’d take out a loan, use the funds to pay off other debts, then make one payment on the personal loan. To get the most out of this, you’d want to get a loan that has a lower interest rate than the debts you’re consolidating.
Debt Settlement vs. Debt Management Plan: Which Is Better?
Debt management plans are designed to help you pay off your debts in full with a monthly payment you can afford. By contrast, debt settlement is a strategy to pay back less than the full amount you owe on a debt. Usually, you agree to pay a reduced balance in a lump-sum payment for a debt that’s already in collections.
In exchange for the payment, the creditor forgives the remaining amount. Generally, debt settlement works best if you already have funds available to make a lump-sum offer to your creditor. With a little confidence and know-how, you can negotiate directly with your creditors.
While you can also hire a debt settlement company, many use sketchy tactics like telling you to stop paying your debt so you can save up money to pay the settlement agency. This can hurt your credit score. They might also charge high fees, which could mean you don’t end up saving much in the long run.
How Does a DMP Affect Your Credit Score?
A debt management plan may temporarily lower your credit score. That happens for two reasons:
Your credit utilization ratio increases. Your credit utilization ratio is how much of your available credit you’re using at a given time. It’s expressed as a percentage. This will likely go up when you start a DMP because most credit card companies close accounts that are included in the plan. Once these credit card accounts are closed, you have less credit available to use. Your credit utilization ratio is the second biggest factor affecting your credit score.
The average age of your credit accounts decreases. Having a long history with different creditors helps your credit score. If you close accounts, your average credit account age may decrease, which can decrease your score as well. This is the third most important factor when calculating your credit score.
Though these two factors can cause a dip in your credit score, remember that the most important factor affecting your credit score is your payment history. So, if you’re hesitant to enter into a DMP because it might hurt your credit, but you’re not able to make all your current payments on time, you can potentially do more damage.
What happens to your credit score when you enter a DMP depends on what your current credit looks like. The good news is that if you keep up your DMP payments and handle any other credit responsibly, you’ll see your score start to climb again.
How Do DMPs Affect Future Access to Credit?
Some people are concerned that participating in a DMP will affect their future chances of securing credit. First, remember that the goal of the DMP is to help you get out of debt. So adding new debts defeats the purpose of the plan and is best avoided until you’re back on solid financial footing.
That said, emergencies happen. Many people in DMPs are able to take out loans for necessities, such as auto loans. The further you are in your plan and the better your payment record, the more likely you’ll be able to finance a car or home. Your DMP administrator can work with you to provide proof of plan payments and other information the creditor may need.
Let’s Summarize…
The first step toward regaining control of your finances is to understand your options. An accredited credit counseling agency can be a powerful resource for people looking for the best type of debt relief for their situation.
One popular debt relief option is a debt management plan. Credit counselors set up and administer DMPs. They also try to negotiate lower interest rates with participating creditors. As a result, you’ll have only one monthly payment that should be more affordable than your previous debts combined.
DMPs usually take 3–5 years to complete. Only certain kinds of unsecured debt, like credit card debt, can be included in the plan. If you have a lot of secured debt, you’ll want to look at other options, including Chapter 13 bankruptcy.
