What Is A Debt Management Plan?

A debt management plan (DMP) is a type of repayment option that is usually set up and managed by an agency. Generally, these repayment plans are intended to help borrowers pay off their debts within 3 – 5 years. Regardless of your total debt balance, trying to keep track of all your monthly payments can be a hassle, which is why they might consider using a debt management plan. 

In this guide, we’ll discuss how debt management plans work, the pros and cons, how to find a reputable counselor, when using this option might make the most sense, and a few commonly asked questions.

How Debt Management Plans Work To Help Borrowers 

Debt management plans are designed by credit counseling agencies to help borrowers payoff unsecured debts. Unsecured debts are types of loans that don’t involve collateral, like credit cards, unsecured personal loans, medical bills and student loans.

Credit counseling agencies, which are usually nonprofit organizations, will look at a borrower’s debt balances and work with their lenders to develop a repayment plan. Generally, borrowers with several types of unsecured loans have several monthly payments. To address this, DMPs will consolidate multiple balances into one, allowing the borrower to pay off all debts by way of single monthly payments. This plan of action is intended to help borrowers become debt free within 3 – 5 years.

Pros And Cons Of A Debt Management Plan

At glance, these are a few of the most notable pros and cons of a debt management plan.

Pros Of Debt Management Plans

Here’s a more in-depth look at the pros associated with debt management plans:

• Professional advice: Whether you’re a finance novice or someone with experience, it’s almost always helpful to receive the guidance of someone who specializes in the subject matter. That’s why one of the main advantages of using a DMP is the access borrowers have to professional guidance.
• Waived fees: Since DMPs usually aim to pay off debts quicker, you may be able to avoid paying late fees and even reduced interest payments.
• Reduced payments: Usually, credit counseling agencies will roll all your debts into a single monthly payment by consolidating. By consolidating debt, you may receive lower interest rates which, in turn, lowers monthly payments.
• An organized budget: A DMP could also help with budget organization. By finding and organizing all your unsecured debt balances, and then creating a plan to pay them off within a certain timeframe, you could have a clearer vision of your path to repayment.
• Quicker debt payoff: A DMP is usually intended to get you debt free within 3 – 5 years, possibly allowing them to get out of debt faster.
• A single monthly payment: Rather than paying multiple debt bills every month, a DMP allows you to consolidate your debt into one balance – meaning you will only have to pay a single monthly payment.
• Less contact from creditors: Using a DMP can reduce the annoying collection calls, emails and other contact from creditors and collection agencies seeking payment.

Cons Of Debt Management Plans

Here’s a more in-depth look at the cons associated with debt management plans:

• Possible fees: Although DMPs are usually organized by nonprofit agencies, borrowers may still have to pay setup fees and monthly fees.
• Less access to new lines of credit: If you’re hoping to open a new line of credit while using a DMP, you might have a difficult time. While paying off your debts will improve your credit score, using a DMP could send up red flags for potential lenders.
• A potential need to close credit accounts: Using a DMP might require you to cancel existing credit accounts, lowering your length of credit history and credit mix.
• The possibility of separate payments: Some creditors may not agree to be part of a DMP, which may require you to pay them separately.
• The possibility that secured debts may not be eligible: While DMPs usually work for certain types of debt, you may not be able to use these programs for secured debts – like mortgages and auto loans.
• Repayment potentially taking up to 3 – 5 years: Depending on your total debt balance, you may spend the next 3 – 5 years paying off your debts.
• More exposure to scams: Scammers are a danger for anyone seeking a DMP. Fraudulent financial counseling/debt management companies are everywhere, so it’s important you find a reputable agency to help you through your journey.
• Impact on your credit score: Using a DMP can lower your credit score by lowering your length of credit history and credit mix.

How To Find A Reputable DMP Counselor

It’s important that you do thorough research and find a credible credit counseling agency to avoid being scammed. Keep in mind that just because it’s listed on the internet does not mean it is legitimate. Scammers generally look to take advantage of people who are vulnerable, making someone with out-of-hand debts a perfect target.

While searching for a credit agency, be sure to only use credit counseling organizations which are Better Business Bureau (BBB) certified. The National Foundation for Credit Counseling (NFCC), for instance, is a nonprofit agency with knowledgeable and certified staff who work to help borrowers navigate the complex world of debt.

When A Debt Management Plan Makes Sense

Every situation is different, but you might consider using a DMP if you simply cannot keep track of your debt balances. You may also look to use a DMP if you’re having a hard time making timely payments. However, if a DMP does not make the most sense for you, there are alternative routes you could take.

Debt Relief Alternatives To DMPs

If a DMP is not in the cards for you, there are other debt relief options to consider including:

• Bankruptcy
• Debt settlement
• Debt consolidation

Taking out a debt consolidation loan may prove difficult depending on how much you need to borrow, but it would allow you to make single monthly payments instead of several. Debt settlement may also be possible, but it’s not necessarily guaranteed. It generally requires lengthy court proceedings and borrowers may come out on the other side of it still required to pay their balance, as well as court fees. Bankruptcy should only be used in extreme cases, as it will greatly negatively impact your credit score and stay on your credit report for at least 7 years.

Every situation is different, so you might find that one of these three options is better for you. Regardless of your decision, it’s important to think it through, crunch the numbers and make the best decision based on your situation.

Debt Management FAQs

Still have questions about debt management plans? A few commonly asked questions include the following.

Is it worth getting a debt management plan?

It depends on your situation. If you’re having trouble keeping track of and managing your debt balances, it might be worth looking into.

What happens when I get a debt management plan?

It varies, but a credit counseling agency will usually work with your credit lenders to create a repayment plan that works for both parties.

How long does it take to pay off a debt management plan?

It depends, but usually 3 – 5 years, depending on your total debt balances and the amount you can afford to pay monthly. 

Which debts can’t I pay off with a debt management plan?

You usually cannot pay off secured debts using a DMP, like mortgages and auto loans.

The Bottom Line: A Debt Management Program Can Help Borrowers Get On Track

It’s natural to feel overwhelmed and worried about debt balances piling up. However, it’s important to keep in mind that you’re not alone in this situation. Debt management plans were designed to help the millions of people who struggle with managing their debt repayments, so you’re not an anomaly. If you’re struggling to repay your balances, you should consider contacting a credit counseling agency to discuss DMPs and alternative options to get back on track and manage your debt.

The best way to avoid getting behind on your payments is to keep track of all your debts and create a budget. If you need a visual of how much debt you owe, download the Rocket Money℠ app and get in-depth visibility over your finances.