How a debt management plan works
- Free budget review. A certified counselor goes over your income, expenses and debts, and tells you honestly whether a plan, a different option, or no program at all makes sense.
- The agency proposes the plan to your creditors. Most major card issuers have agreements with nonprofit agencies to lower interest rates and often waive late and over-limit fees.
- You make one monthly payment to the agency, which pays each creditor.
- Enrolled cards are usually closed, and you pay the balances down to zero in three to five years.
Example: $25,000 of cards at 22%. On a five-year DMP at 8% with a $40 monthly fee, the payment is about $547 a month (including the fee), and the total is roughly $32,900. That's far less than the roughly $69,800 minimums would cost, and you avoid settlement's credit damage.
Upsides
- Free advice, even if you don't enroll
- Much lower interest without needing good credit
- No settlement marks, lawsuits or tax bills
- One payment, fixed end date
Downsides
- You repay the full balance
- Cards are usually closed
- Miss payments and creditors can drop the concessions
- Needs steady income for 3–5 years
How to find a legitimate agency
- Look for an agency affiliated with the National Foundation for Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA).
- Counselors should be certified, and the agency should explain all fees in writing before you sign.
- "Nonprofit" alone isn't proof of quality. Ask what happens if you miss a payment and how fast your money reaches creditors.
- Be wary of anyone who pushes a plan before reviewing your full budget, or who charges large upfront fees.
Common questions
How much does a debt management plan cost?
The first counseling session is usually free. If you enroll in a plan, agencies commonly charge a small setup fee and a monthly fee, often in the $25 to $50 range, and many states cap these fees. Agencies may reduce or waive fees if you can't afford them.
Does a debt management plan hurt your credit?
A DMP itself isn't usually treated as a negative mark, though creditors may note that the account is in a plan and enrolled cards are usually closed, which can affect your score. Making every payment on time tends to help your credit over the life of the plan.
Counseling or settlement?
One repays in full and protects your credit. The other pays less and hurts it. Here's how to choose.
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