Dmitry Belyaev/Getty Images

What exactly does a debt management plan involve?

Do you have pressing debt? Learn what happens when you enroll in a debt management plan


Debt management plans are designed to help people with pressing credit card debt delete expensive and out-of-control balances. Here is what you need to know about how they work.

The content on this page is accurate as of the posting date; however, some of our partner offers may have expired. Please review our list of best credit cards, or use our CardMatch™ tool to find cards matched to your needs.

Almost as soon as credit cards became commonplace in the United States, organizations that helped cardholders deal with their resulting debt sprung up. In 1951, the National Foundation for Credit Counseling opened to the public. Another national trade association, the Financial Counseling Association of America, opened in 1993. Through these nonprofit organizations individuals can obtain free financial advice, and, in some circumstances, be enrolled in a debt management plan.

Debt management plans (DMPs) are designed to help people with pressing credit card debt delete expensive and out of control balances. Here is what you need to know about how they work.

What is a debt management plan?

A DMP is a consolidation program. Instead of paying your creditors directly, you would make a single payment to the credit counseling agency, which then distributes the payments to your creditors for you. It’s not a consolidation loan or a debt settlement, but a third-party arrangement.

In general, the creditors you would include on a DMP are credit card companies, though a few also allow you to include other debts, like medical bills, unsecured loans and collection accounts.

Your credit cards may be current or past due, but in either case you would close the accounts so would not be able to charge on them any longer. The intention is to get out of debt as fast as possible. In most cases, the plans are arranged for total debt repayment in three to five years.

Debt management plan fees and interest

In addition to not having to manage multiple creditors, thus streamlining your financial management, most of the credit card companies have preset agreements to lower or even eliminate interest for people who are on the plan.

“Every creditor has their own policies,” says Howard Dvorkin, chairman of and founder of Consolidated Credit Counseling. “Some waive interest entirely, some reduce the rates and others charge the interest in full and then credit it back to you when you’re done with the plan. Ninety-nine percent of lenders help out in some way.”

Depending on the credit counseling agency, there may be a one-time setup fee, which is typically between $30 and $50, plus a monthly administrative fee ranging from $20 to $75. Under some circumstances, however, many agencies will waive these fees.

How much can you save with a debt management plan?

With a DMP, the payment you make remains constant. After each debt is satisfied, the other creditors get a larger payment.

Slashing interest rates and maintaining a fixed payment schedule can have a powerful effect on the amount of money and time you save, especially when both the initial APRs and balances are high.

For example, credit counseling agency Money Management International recently demonstrated the difference of paying $18,150 in credit card debt off by sticking to the credit card company’s minimum payments versus using a DMP:

  • Minimum payment: With an average APR of 27.77 percent, it would take 351 months and $40,573 in interest to pay off. The total payment would be $58,723.
  • DMP: With an average APR of 6.41 percent, it would take 48 months and $2,445 in interest to pay off. The total payment would be $21,828.

The DMP, in this scenario, would save you $36,895 — and 25 years worth of payments.

It’s an agreement, not a contract

Enrolling in a DMP is totally voluntary. You are not entering a contract with the agency, and it does offer some flexibility. You can send more money if you have extra funds, which will help you delete your debt faster. And if you want to self-administer, just let the credit counseling agency know. At that stage you can begin to make your payments on your own again. Just be prepared for a payment and rate hike.

“Once the credit counseling agency notifies your creditors that you’re no longer on the plan, the payments and interest goes back to what they were before,” says Dvorkin.

Although you would consent to make the entire payment as agreed by a certain day of the month (usually electronically withdrawn from your checking account), if you’re having trouble it’s important to contact the agency. If you default on  payments you make via the DMP, the interest rates will likely revert to what they were before. The agency may be able to step in and help you figure out a way to pay on time or prevent the credit card companies from taking that action.

How do you know if you’re eligible for a debt management plan?

Your first step is to make a free appointment with a credit counseling agency, which you can find by visiting either the National Foundation for Credit Counseling or the Financial Counseling Association of America. You will meet with a credit counselor, usually by phone or online. These professionals have received special training and are certified to conduct budget and debt counseling.

The credit counselor will review your income, expenses and debts. Appointments typically take an hour. Once done, the counselor will make recommendations that can help you make ends meet or will suggest different resources.

DMP payments are based on individual creditor requirements. Some expect 2 percent of the balance, others 2.5 percent and still others 3 percent.

In the event that you have too much money left over in your budget, the DMP won’t make sense because you can clearly manage your own financial affairs with a few adjustments. If you don’t have enough money to make the DMP payment, it won’t be presented because it won’t help your situation. In that case, your counselor may suggest hardship plans or even that you explore bankruptcy.

How debt management plans affect credit

Unlike with a debt settlement or filing for bankruptcy, with a DMP, you would pay off 100 percent of your debt. For this reason, credit card companies tend to be in favor of these plans. Not only are you repaying the amount you borrowed, you are reestablishing a positive relationship with them.

If you started out the DMP as delinquent, after three consecutive payments most credit card companies will mark you as current on your credit report. It won’t purge the late payments (they will stay for a total of seven years), but it can help you rehabilitate your credit. Payment history is the important credit scoring factor, so getting back on track with a DMP can make a positive difference in your scores.

Another credit advantage is that it can free up funds for you to make payments on other financial obligations. The total DMP amount you pay can shave 30 percent off the original payments, says Dvorkin. That money can then go toward your mortgage, car payment, student loan or any other debt that you couldn’t include in the DMP.

There are some issues to be aware of, though. You will be closing your accounts, which can increase credit utilization — the second weightiest FICO scoring factor. Still, as you pay the debt down, your credit utilization will eventually be in a better position.

Some credit card companies do report that you are working with a third-party to repay your balances, but that notation is not included in a FICO score. If other lenders or companies pull your actual credit report, they will see it and can make their own opinion on whether it’s negative or positive.

Bottom line

“A DMP is just one tool, but under the right circumstances it can be really helpful,” says Dvorkin. If it will save you a substantial sum, get you out of debt quickly and repair damaged credit, a DMP can be a wise decision. It can also offer much needed relief after trying to shuffle bills and fielding phone calls from lenders wanting to know why you haven’t made a payment.

A credit counseling plan can also be your opportunity to exercise healthy financial habits. The counselor will assist you develop a budget that reduces waste. As you pay your debt down, you won’t be relying on credit products to get you by when cash runs short. By the time you make your last DMP payment, you should be in a far better position to take out the best credit cards and keep yourself free from drowning in overwhelming balances.

Editorial Disclaimer

The editorial content on this page is based solely on the objective assessment of our writers and is not driven by advertising dollars. It has not been provided or commissioned by the credit card issuers. However, we may receive compensation when you click on links to products from our partners.

Credit Card Rate Report
Cash Back

Questions or comments?

Contact us

Editorial corrections policies

Learn more