What is a Debt Management Plan and Will it Work for You? 

Key takeaways: 

• A debt management plan lowers the interest rate on unsecured debts, providing more affordable monthly payments. 
• Debt management plans are offered by credit counseling agencies and work only with unsecured debts. 
• It’s a good idea to evaluate all types of debt relief programs, including debt management, before making a decision. 

If you are looking to get out of debt – especially credit card debt – and are checking into options to help, you may have heard of credit counseling or of debt management plans. Here, we’ll explain what these are, and provide information to help you decide if debt management is a good option for you. 

Debt management and credit counseling go hand-in-hand. That’s because debt management plans are offered by credit counseling firms. Through agreements they maintain with credit card issuers, credit counseling firms can create a new payment plan for you – a plan called a debt management plan. 

Debt management plans typically lower the interest rate on a credit card. In turn, your monthly payments decrease and can become more manageable. Because the total amount of debt you owe will not change, that plan usually also extends the time period over which you will be paying off your debt. Participants in debt management plans make a monthly payment to the credit counseling agency. The agency then distributes the funds to creditors.  

It’s important to note that a debt management plan is different than debt settlement, which involves negotiating directly with creditors to reduce the amount of principal you owe on your unsecured debt. You can negotiate on your own or hire a company to work with creditors on your behalf. Debt settlement or (debt relief companies as they are sometimes known) typically charge a fee consisting of between 15% to 25% of the total outstanding debt.  

Important considerations 

Debt management plans are available only for unsecured debts, which are debts not backed by collateral. Unsecured debts include credit card debt, personal loan debt and medical debt owed directly to providers. Debt management plans do not work with secured debt, such as mortgages or vehicle loans. 

Also, as you learn more about debt management plans and the agencies that provide them, understand that not all credit counseling agencies are nonprofit. Moreover, “nonprofit” does not guarantee that services offered are free, low-cost or even legitimate. Do your research, ask questions and think carefully before making any decisions on a debt management plan – or any plan to help you eliminate debt. 

Debt management plan pros 

• More affordable monthly payments. Enrollment in a debt management plan can make it easier for some consumers to afford monthly debt payments and get on a defined path to paying off their debt.  

• One monthly payment. In a debt management plan, you send one payment to the credit counseling agency each month. The agency then distributes the funds to creditors. If you are enrolling multiple debt accounts in the plan, managing one monthly payment can be much easier than managing multiple payments to multiple creditors each month. 

• Possibility of waived fees. The credit counseling agency may be able to work with your creditors to waive previously charged fees. 

• Additional resources. Some credit counseling agencies that offer debt management plans also offer other resources to help you with your finances. These resources could include help with budgeting, student loan payoff and information on other debt relief alternatives. 

• Possibility of improved account status. If you are enrolled in a debt management plan, creditors may agree to update your account status to “current” once you’ve made several on-time payments. This can save on late fees and reflect positively on your credit reports, and ultimately, credit scores.  

Debt management plan cons 

• Amount of monthly payment. Since debt management plans do not reduce the total principal amount of debt you owe, the payments often are just slightly lower than regular minimum payments. 

• Fees. Debt management plans assess a set-up fee and a monthly fee for each account enrolled. Over the course of a multi-year plan, the fees can an add up. Consumers need to carefully weigh the interest savings they will obtain against the cost of the program. 

• Reduced access to credit. You will need to close credit card accounts included in the debt management plan. Some creditors may also require that you stop using credit cards not part of the plan while enrolled.  

• Conflict of interest. Debt management plans are based on pre-arranged agreements with creditors. Agencies also earn revenue from the credit card companies, called “fair share” payments. 

• Impact on credit scores. Enrollment in a debt management plan will not directly impact credit scores, although it’s not uncommon for creditors to add a note to credit reports indicating that you are in a plan. If, per above, you do need to close credit card accounts, you may experience a negative effect on your credit scores. Also, closing accounts will decrease your total “credit available,” potentially leading to a higher utilization rate. That will negatively impact credit scores.  

On the other hand, paying off debt will help build positive payment history, a key component of credit scoring.  

How to find a debt management plan 

Some consumers start by asking their credit card issuers which credit counseling firms they use or ask other financial services providers for recommendations. Unlock has a partnership with Money Management International, a nonprofit organization that provides financial services and debt management plans in all 50 states. 

You may also check with the United States Trustee Program. Part of the U.S. Department of Justice, the Trustee Program provides a list of approved credit counseling agencies.  

It can be a good idea to check the Better Business Bureau (BBB) accreditation of agencies offering debt management plans, and learn how different agencies deal with complaints. Understanding their approach can provide insight into the company’s customer service. Also take some time to read reviews of agencies in which you are interested on credible review sites, such as TrustPilot and the BBB. 

Conclusion 

A debt management plan can be a good choice to help some consumers pay down unsecured debt. Before making the decision, be sure to weigh the pros and cons, and research your options carefully.