How Do Debt Management Plans Work?

Tackling debt on your own can feel stressful at best — and at worst, completely overwhelming. But if your situation isn’t too severe, a debt management plan from a credit counseling agency may be able to help. 

With the assistance of a credit counselor, these plans could help get you a lower interest rate or reduced monthly payments, while also creating a payment plan to help keep you on track. Unlike with debt consolidation, you’re not required to have a good credit score to qualify for debt management plans. These plans can’t reduce your principal balance — as is possible with debt settlement — but they won’t have as much of an impact on your credit, either.  

While debt management plans could help you get a handle on your finances, they may not make sense for everyone. Be sure you fully understand how these plans work before you decide to enroll. 

How do debt management plans work? 

Debt management plans are one of the primary offerings from non-profit credit counseling organizations. They can be used to help you pay off high-interest unsecured debt, typically credit cards. Secured debts like auto loans or mortgages don’t qualify for these types of plans. 

When you first meet with a credit counseling agency,  a counselor will review your financial situation — your debt, income, budget and goals — and, if it makes sense, enroll you in a debt management plan. 

The counselor will then negotiate a new payment plan on your behalf directly with your lenders. These counselors can’t reduce your principal. Instead, they may be able to lower your monthly payments, relieving your wallet a bit. They may also be able to get the lender to give you a longer amount of time to pay off the debt, waive fees or lower the interest rate. 

Once the plan is in place, you pay the credit counseling agency monthly, and the agency pays your creditors directly. This way, you only have to keep track of one payment instead of the varying amounts and deadlines that come with being in debt to multiple lenders. 

Keep in mind that during this time, you won’t be able to use any credit card accounts that are included in your debt management plan. You may also be required to stop using credit cards that aren’t in your plan. This will vary: Money Management International, for instance, allows clients enrolled in debt management plans to keep one credit card account open for emergencies. 

How much do debt management plans cost? 

Credit counseling agencies will charge you a fee in exchange for their services. You’ll usually owe an initial set-up fee as well as a monthly fee. 

Those costs will vary by organization and where you live. Money Management International, for instance, charges an average of $38 for a one-time set-up fee (capped at $75) and an average of $27 for the monthly fee (capped at $59). American Consumer Credit Counseling (ACCC) charges a one-time $39 enrollment fee and $7 maintenance fee per account, and advises that you avoid agencies trying to charge you more than $70 per month for a debt management plan. 

How long do debt management plans take? 

Enrolling in these plans is a commitment: You can usually expect to pay off your enrolled accounts after three to five years. 

How do you enroll in a debt management plan? 

When you’re looking for a credit counseling agency, it’s crucial to work with a legitimate and reputable organization. Those that fit the bill will be accredited by the National Foundation for Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA), which require their members to meet strict requirements that help ensure transparency and fair practices. 

The Department of Justice also has a list of approved agencies, which you can filter through to find organizations in your state. But you should still do your own research. If a credit counseling agency isn’t being upfront about their fees, is making unrealistic promises (like offering to lower the amount of money you owe) or is asking you for money before they’ve completed any services, it’s time to look elsewhere. 

Once you’ve found a reputable credit counseling agency to work with and the counselor has reviewed your financials, they’ll assist you in enrolling in the plan if you both deem that the best next step. When the counselor shows you the agreement, be sure to closely look at details, including the accounts that will be included in the plan, cost, timeline, monthly payment amount, amount of interest you’ll save and whether you’re required to close your credit card accounts. 

If you decide the plan makes sense and you sign the agreement, you’ll then make your first payment. 

Does a debt management plan impact your credit score? 

Working with a credit counselor won’t directly impact your credit, but a debt management plan can indirectly affect your credit score. Plus, creditors may make a note on your credit report that you’re enrolled in a debt management plan, and while that doesn’t factor into your score, it may sway other creditors when they’re deciding to let you borrow. 

These plans often call for you to close accounts, which can lead to a higher credit utilization ratio. This ratio compares how much credit is available to you and how much you’re actually using. The lower the ratio, the better. At the same time, closing those accounts also means you won’t be adding more debt, so your balance will ideally decrease and eventually, so will the utilization score. Closing an account can also decrease the length of your credit history, and the credit scoring models factor that length into the overall score.

Any downward effect on your credit from these moves is usually temporary. If you’re seeking out a plan, there’s a good chance you’re already struggling to make payments on time. Making those payments — and potentially getting past-due accounts listed as current — should help boost your credit score over the long term.

Who should use a debt management plan? 

In your initial consultation with a credit counseling organization, a counselor will assess whether a debt management plan is a good fit for your situation. In general, though, these plans are best for consumers who: 

• Need some budgeting assistance and help staying disciplined while paying down unsecured debts.

• Are struggling with unaffordable interest rates.

• Are able to close existing credit cards.

• Can afford some monthly payments. 

• Are worried about maintaining (or building) their credit.

Alternatives to debt management plans

If debt management plans aren’t a good fit for you, you could also consider debt settlement or bankruptcy, though you need to carefully weigh the potential downsides of both. With debt settlement, you can work with a debt relief company that will negotiate with your lenders to see if they’ll accept a settlement that’s less than you owe. (You can also attempt this negotiation strategy on your own.) 

Debt relief companies charge a fee for their services — typically 15% to 25% of your enrolled debt — but you only pay this if they’re successful in getting a creditor to accept a settlement and you approve the settlement offer. One key detail: Creditors are often only willing to negotiate if you’re already behind on your accounts, and even then, there’s no guarantee they’ll be willing to negotiate. Delinquency can hurt your credit and add late fees to your overall debt. You’ll also need some cash coming in so that you can build up enough savings for when it comes time to pay creditors. While you could see your first settlement within a few months, it could take up to four years to go through the settlement process on all your accounts.  

Bankruptcy should be considered a last resort. But if you don’t have enough stable income to save up money to negotiate with creditors, then bankruptcy may be your best option to get a clean slate. That’s especially true if your income is low enough to qualify for Chapter 7 bankruptcy, which can result in discharging most of your debts in less than six months — though it will remain as a negative mark on your credit report for up to a decade.