What Is a Debt Management Plan? Your Guide to Lower Payments
A debt management plan helps you pay off unsecured debts like credit cards through one affordable monthly payment. Credit counselors negotiate lower interest rates and create a 3-5 year repayment plan. Only unsecured debts qualify, so if secured debts overwhelm you, explore Chapter 13 bankruptcy instead.
Get Free CounselingA debt management plan combines your debts into one monthly payment. You get a lower interest rate and simplified payments. Credit counselors set up these plans, which typically run 3-5 years.
Only certain debts qualify for a DMP. Credit card debt works well. Secured debts like mortgages and car loans don’t qualify.
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Get a free consultation with Cambridge Credit Counseling to explore a debt management plan. See if you can reduce your interest rates and combine payments into one affordable monthly amount.
Start Free ConsultationIf secured debt overwhelms you, explore other options. Chapter 13 bankruptcy might be a better fit.
What Is a Debt Management Plan?
A debt management plan (DMP) helps you repay unsecured debts like credit cards. The plan makes your payments more affordable and organized.
You work with a nonprofit credit counseling agency to set up your DMP. A credit counselor reviews your budget and total debt. They reach out to your creditors to negotiate better terms.
Your counselor aims to lower interest rates and stop late fees. They create a payment plan you can actually stick to.
You make one monthly payment to the credit counseling agency. They distribute the funds to your creditors. You don’t juggle multiple due dates anymore.
Most people complete their DMP in 3-5 years through consistent payments. You typically agree not to open new credit cards during this time. You also commit to avoiding new debt.
A DMP doesn’t reduce what you owe. Instead, it makes your monthly payments manageable. You avoid bankruptcy or risky debt settlement options.
How Do You Set Up a Debt Management Plan?
Start by scheduling a free counseling session at a nonprofit agency. An accredited credit counselor guides you through the process.
Your counselor helps with several key areas:
- Managing your debt effectively
- Creating a realistic budget
- Improving your credit score
- Finding financial stability
They also explain other debt relief options:
- Debt consolidation
- Bankruptcy protection
- Debt settlement strategies
Want expert help with a DMP? Our partner Cambridge Credit Counseling offers free consultations. Cambridge is an NFCC-accredited nonprofit agency.
How Do Debt Management Plans Work?
Your credit counseling agency negotiates with your creditors. They create a payment plan that fits your budget.
The agency often secures lower interest rates. High-interest credit card debt becomes much more affordable. You pay less over time and enjoy lower monthly payments.
A DMP doesn’t reduce your debt balance. The goal is making those balances easier to pay off. Lower interest rates and extended payment periods help tremendously.
You make one monthly payment to your plan administrator. They distribute funds to your creditors based on the agreement.
You stop juggling due dates and minimum payments. Keep your DMP payments current and you avoid late fees. Collection calls stop. The stress of overwhelming debt fades away.
How Long Does a DMP Take?
DMPs typically take 3-5 years to complete. The National Foundation for Credit Counseling confirms this timeline.
No standard plan length exists. Each debt management plan is customized. Your specific debts and income determine the timeline.
How Much Do DMPs Cost?
Nonprofit credit counselors offer free initial sessions. Your first consultation lasts 30-60 minutes at no charge.
You pay a setup fee and small monthly fees afterward. Fees vary by agency and total debt amount.
Reputable agencies disclose all costs upfront. They tell you exactly what to expect before starting work.
For-profit debt management companies charge much more. Avoid them whenever possible. Always ask about costs, monthly payments, and plan duration.
Something feels off? Trust your instincts. Learn about common debt relief scam red flags.
What Debts Can Be Included in a Debt Management Plan?
DMPs work great for high-interest credit card debt. Most unsecured debts can join your plan.
Unsecured debts aren’t backed by collateral. Common types include:
- Credit card debt (including collection accounts)
- Medical bills
- Personal loans
- Payday loans
Each creditor must agree to your DMP. Major credit card companies often have existing relationships with counseling agencies. The agency may know in advance if a creditor will participate.
Medical bills and payday loans are less predictable. Some creditors agree to work with agencies. Others don’t.
What Debts Can’t Be Included in a DMP?
Car loans don’t qualify for DMPs. Mortgages don’t qualify either. These are secured debts backed by collateral.
Struggling with your mortgage? Call your lender directly. Explain your financial hardship. Ask about available assistance programs.
Student loans generally can’t join a DMP. Federal student loans have their own repayment options.
Explore federal repayment plans if you’re behind on student loans. Chapter 7 bankruptcy can eliminate student debt in certain cases.
How Is Debt Management Different From Other Debt Relief Options?
Debt management, debt settlement, and debt consolidation sound similar. They offer very different solutions.
Here’s how debt management plans compare to other options.
Debt Consolidation vs. Debt Management Plan: Which Is Better?
Debt management plans are a type of debt consolidation. Most people mean consolidation loans when discussing this option.
A DMP isn’t a loan. You qualify more easily for a DMP. Good news if your credit report has some dings.
Both options combine multiple accounts into one payment. Both can lower your monthly payments and reduce interest rates.
One DMP downside: You typically close credit card accounts. Your credit score may drop temporarily.
What Is a Debt Consolidation Loan?
Two common types of debt consolidation loans exist:
- Credit card balance transfer: Move several high-interest balances to one lower-interest card. Many cards offer introductory periods with little or no interest.
- Personal loan: Borrow money to pay off other debts. Make one payment on the personal loan. Choose a loan with lower interest than your current debts.
Debt Settlement vs. Debt Management Plan: Which Is Better?
Debt management plans help you pay debts in full. You get affordable monthly payments.
Debt settlement means paying less than you owe. You typically make a lump-sum payment on a collection account. The creditor forgives the remaining balance.
Debt settlement works best with available funds. You can negotiate directly with creditors yourself.
Avoid debt settlement companies when possible. Many use sketchy tactics. They tell you to stop paying creditors to save money. Your credit score suffers.
High fees mean you save less than expected. Handle settlement negotiations yourself when you can.
How Does a DMP Affect Your Credit Score?
A debt management plan may temporarily lower your score. Two reasons explain this:
- Your credit utilization ratio increases. Credit utilization measures how much available credit you use. Most credit card companies close accounts in your DMP. Less available credit means higher utilization. Utilization is the second biggest factor affecting your credit score.
- Your average account age decreases. A long credit history helps your score. Closing accounts reduces your average account age. Account age is the third most important credit score factor.
These factors cause a temporary score dip. Remember that payment history matters most. Missing current payments damages your credit more than entering a DMP.
Your current credit determines what happens to your score. Keep up DMP payments and handle other credit responsibly. Your score will climb again.
How Do DMPs Affect Future Access to Credit?
Some worry that DMPs hurt future credit chances. Remember the goal: getting out of debt. Adding new debts defeats the purpose.
Avoid new debt until you’re financially stable again.
Emergencies happen. Many DMP participants qualify for necessary loans. Auto loans remain accessible for most people.
Your progress in the plan matters. A strong payment record helps tremendously. Your administrator can provide proof of payments to potential creditors.
Understanding Your Debt Relief Options
You need to understand your options to regain financial control. An accredited credit counseling agency provides powerful resources.
Debt management plans offer popular debt relief. Credit counselors set up and administer your DMP. They negotiate lower interest rates with participating creditors.
You make one affordable monthly payment. The payment should cost less than your previous debts combined.
DMPs take 3-5 years to complete. Only unsecured debts like credit cards qualify. Secured debts require different solutions.
If secured debt overwhelms you, consider alternatives. Chapter 13 bankruptcy might work better for your situation.
Ready to explore your options? Our partner Cambridge Credit Counseling can help you create a personalized debt management plan.