What Is a Debt Management Plan and How Does It Work?

If you’re making only minimum payments on your credit cards or your creditors call more than your friends, you might benefit from a debt management plan (DMP). 

You’re not alone, either. Federal Reserve data found that credit card balances had reached $1.21 trillion at the end of 2024, a 7.3% increase from the previous year, with more people transitioning into delinquency (or unable to make their minimum payments). 

A debt management plan, however, could potentially lower your monthly payments and interest rates to make debt payoff feasible. We’ll explain how debt management plans work, how to compare debt management companies, and how to decide if a DMP is the right move for you.

What is a debt management plan?

A debt management plan is a strategy for repaying unsecured debt, such as credit card debts and medical bills, when the debt has become difficult for you to handle. Though you could potentially create such a plan yourself, most DMPs are administered through credit counseling agencies. A licensed credit counselor negotiates directly with your creditors to craft a plan that provides you some breathing room — often by reducing interest rates, fees, or extending repayment terms.

The benefits of a DMP can be significant, including:

• Potential interest savings: Interest savings could be substantial. “It’s not unusual to negotiate an interest rate down from, say, 25% or 30% to as low as 2% or 5%,” says Todd Christensen, a financial education manager for Debt Reduction Services, a nonprofit credit counseling agency. “That change is huge.”
• Potential credit score improvements: Payment history accounts for 35% of your overall FICO score, the most of any single factor used in the FICO scoring model. If you’re falling behind on payments, you’re already damaging your score. However, if you start making on-time payments, you could see a score improvement within 6 months. 
• A single payment: Instead of paying multiple accounts individually, you make a single payment to the credit counseling agency, which then splits it up among your creditors. 

How does a debt management plan work?

The elements of a debt management plan typically include:

• Consultation: Start by checking the FCAA or the National Foundation for Credit Counseling (NFCC) for a list of nonprofit agencies in your area. Nonprofit counselors typically don’t charge a consultation fee. 
• Payment plan: A debt management plan is a partnership between you and a credit counseling organization, says Lori Pollack, executive director of the Financial Counseling Association of America (FCAA), a nonprofit credit counseling service. Under the plan, you agree to make a single monthly payment to the credit counseling agency, which then distributes the money to your creditors. The amount you owe and the duration of payments is detailed in the DMP as negotiated by your credit counselor.
• Fees: Debt management programs typically come with fees. While your initial consultation may be free, most programs charge enrollment fees (ranging from $25 to $50) and monthly maintenance fees (from $30 to $70). Fees are regulated and vary per state. “Some states may have a base fee that they adjust annually for CPI (Consumer Price Index),” Pollack says. “The counselor will let you know what your monthly fees will be.”

Debt management plans are designed to last no longer than five years, giving you a clear path forward to debt payoff. 

How to get a debt management plan

To enroll in a debt management plan, generally follow these steps:

1. Choose an accredited organization to administer the plan. 
2. Schedule a consultation to review your financial situation and debt.
3. Review and agree to the organization’s debt management plan fees and requirements.
4. Close your credit card accounts with balances.
5. Be patient while the plan is negotiated. 
6. Begin making payments.

You can expedite the enrollment process by totaling your debt and bringing your credit card statements with you before your consultation. Your counselor may also perform a soft credit pull to approximate your balances. 

You must also close all your credit cards with balances. McClary says that debt management plans typically restrict you from taking out new loans or lines of credit, as well. “We don’t want you digging a new hole when you’re working to get out of one.” 

But before enrolling, it’s important to consider what’s required: Can you live without your go-to credit cards for several years? Do you have the discipline to see your plan through to the end? You’ll have help, of course, but remember that if you miss one payment to your agency, you could be back to square one or worse.

Tips on choosing a debt management company

Choosing a debt management company is a decision you can’t afford to get wrong. Do your due diligence and use common sense. Here’s a checklist:

• Read, research, and build your knowledge base: This article and others should get you off to a good start.
• Check accreditation: If you have found a nonprofit you like, but it’s not an accredited member of the Financial Counseling Association of America (FCAA) or the National Foundation for Credit Counseling (NFCC), ask why not. Maybe there’s a good reason, maybe there’s not. 
• Consult a nonprofit first: Nonprofits and for-profits have different business models. Even if you consult a nonprofit first, keep in mind its status doesn’t guarantee low fees or reputable service. 
• Get confirmation: Read reviews and testimonials on websites like TrustPilot and Yelp. Did the debt management companies you’re reviewing deliver on their promises and services?
• Use government resources: Many states require debt management organizations to be licensed. If complaints or regulatory actions have been taken against an organization you’re considering, your state attorney general’s office or the Consumer Financial Protection Bureau (CFPB) may have a record.

Steer clear of the organizations that:

• Boast about government programs that can make your debt go away
• Tell you they can stop all creditor calls and lawsuits 
• Guarantee they can negotiate rate reductions with all your creditors 

Debt management plans vs. debt settlement

In launching your financial comeback, you need to know the difference between debt management and debt settlement companies. It’s easy to confuse the two. Debt management is a full repayment strategy and obligation negotiated at a potentially lower rate to make your repayment affordable and doable over a number of years.

Debt settlement is a blunter debt resolution instrument. You negotiate to pay back just a portion of what you owe. Although the settlement is final and may be shorter than a debt management plan, it will likely lower your credit score and leave you with tax consequences.  

• For example, say you owe $10,000 on a credit card and offer $6,500 to pay off the debt in full. If your creditor accepts, you save $3,500 (a 35% reduction), and your creditor gets a write-off.  

Creditors may consider such offers on certain debts, like credit card debt, because they’re unsecured. In other words, the creditor can’t seize your home or auto for nonpayment. Accepting a partial repayment versus recouping full repayment via protracted and expensive actions (involving the courts or collections agencies) is often in their best interest. 

But debt settlement can be a double-edged sword. Unlike DMPs, debt settlement typically requires that you stop paying your creditors until a settlement has been reached. If your creditors don’t agree to your plan, your debt is likely to increase due to mounting interest, late charges, and other fees for non-payment.

“This can leave you worse off than when you started,” Pollack says. 

There are other drawbacks, as well. A debt settlement will likely damage your credit score. Plus, the IRS typically treats forgiven debt (in our example, the $3,500 you didn’t pay) as taxable income that you must report on your tax return.

Another type of credit counseling organization, a debt relief company or organization, may offer both debt management and debt settlement services. So, ask upfront what kind of relief plan the company has in mind for you. 

Pros and cons of debt management plans

If you like the goal and challenge that a debt management plan presents, your debt reduction savings could be significant. You will have a clear payoff date to shoot for and receive monthly statements to monitor your progress toward your goal. On the other hand, if you’re struggling to pay secured debts, like your home or auto loan, a DMP may not be right for you.

With reduced debt and a higher credit score resulting from your improved payment history, you will likely be in a much better financial position to achieve other goals, like financing a home, auto, or other high-ticket purchase at a much better interest rate. 

Alternatives to debt management plans

Don’t limit your search to debt management companies alone; be open to other alternatives that may be a better fit for solving your debt situation. Here are a few: 

Debt consolidation loan

A debt consolidation loan takes a page from the debt management playbook, in that you make one debt payment a month to your lender instead of several payments to a clump of creditors. Using a loan to help you pay off debt may be the ideal solution if you can get an annual percentage rate (APR) lower than the average you’re now paying on all your cards and other debt instruments.

With a fair or poor credit score, however, a debt consolidation loan may leave you no better off than when you started your debt-demolition crusade. Most debt consolidation lenders offer free online calculators to show you what your interest rate, interest savings, and monthly payments might look like.

Balance transfer credit card

Switching debt to a lower-rate or 0% APR credit card could help you pay off your debt sooner. You might have a 0% APR balance transfer offer on an existing card or may need to apply for a new card. However, if you fail to pay your debt in full during the 0% introductory period, you'll be charged interest on the remaining balance, which could result in a higher APR than your original loans or credit cards. 

To qualify for a new 0% APR balance transfer credit card, you’ll typically need good credit.

Home equity products

A home equity loan is a fixed-rate second mortgage that you pay back in installments, while a HELOC is a line of credit that you draw on as needed. Both are secured by the equity in your home. 

If you have sufficient equity and a relatively high mortgage rate, a cash-out refinance is worth considering. If you have a current low-interest rate mortgage, a home equity loan or HELOC might be a better option. 

With all home equity products, if you don’t comply with the loan terms, your home could be at risk of foreclosure.  

Debt settlement

The idea of paying 50 cents or 70 cents on every dollar you owe a creditor may seem appealing, just as a way to move forward. But there are some clear caveats you can’t afford to ignore. As part of the process, the debt settlement company may ask you to stop paying your debts to bring your creditors to the negotiating table. Plus, there are no guarantees. If you don’t settle, the interest, fees, and other charges on your debt can send your balances soaring, sinking your credit score and exposing you to collection agencies and civil lawsuits. 

More alternatives

Borrowing from investment accounts, retirement accounts, or even family members are other get-out-of-debt possibilities worth exploring with a reputable, results-oriented credit counseling organization.