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Published: Jul 31, 2023 13 min read

If you're struggling with mounting debt and high-interest rates, a debt management plan may help you regain control of your finances.

A debt management plan (DMP) is a repayment strategy offered by credit counseling agencies that usually involves budgeting, consolidating debts and negotiating with creditors. It can help you pay less in interest charges, avoid collection calls and become debt-free sooner.

Here's everything you need to know about debt management plans, how they work and their possible downsides.

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How does a debt management plan work

Debt management plans are programs designed to help individuals struggling with mounting debt. These plans are available through credit counseling agencies that provide financial workshops, personalized advice and other debt solutions, like bankruptcy counseling.

When you sign up for a debt management plan, a credit counselor evaluates your income, expenses, outstanding debts and overall financial situation. Based on this assessment, the counselor will negotiate with your creditors for more favorable terms, such as reduced interest rates, lower monthly payments or eliminating late fees. Some lenders may also waive late fees (if you have any).

If the lenders agree to new terms, you'll have to send the credit counseling agency a single monthly payment that covers your bills. The agency will be in charge of distributing the funds to your creditors until each debt is settled.

Note that debt repayment plans are not a quick solution. They can take between three to five years on average to complete. However, they can help you improve your credit score by reducing debt and creating a history of timely payments. They can also help you improve your financial habits since your debt management counselor will provide ongoing support and education to help you avoid excessive debt in the future.

How to qualify for a debt management plan

Debt management companies don't usually have specific eligibility requirements, so individuals with any amount of debt may enroll. However, during your credit counseling session, you'll have to provide documents that prove you're struggling to make timely payments. Some documents you may show your counselor include:

  • Pay stubs
  • Credit card bills
  • Loan statements

A credit counselor will usually not recommend a debt management program if you have enough income to cover monthly expenses and debt payments comfortably. You'll also be ineligible for the program if your outstanding balances and expenses exceed your income, meaning you can't make monthly payments.

In those cases, your counselor might help you create a budget or recommend other debt-relief options, like bankruptcy.

Debts you can and can’t pay off with a debt management plan

Debt management plans are mainly designed for people struggling with debt from credit cards and/or personal loans. Student loans and secured debts such as mortgages and auto loans aren't eligible.

How much does a debt management plan cost

Nonprofit agencies usually offer free counseling and educational resources. However, enrollment in a debt management plan may have a monthly and setup fee. The average cost for both fees can range between $20 and $50; however, many agencies may reduce or waive the price for individuals who are unable to afford the total cost.

How to find a credit counseling agency

It’s important to note that credit counseling agencies can be non-profit or for profit.

Non-profit agencies are accredited by the National Foundation for Credit Counseling (NFCC), a network of counselors focused on consumer rights and certified to provide financial education to individuals struggling with debt. These agencies offer free budgeting and credit counseling sessions and other financial services for a small fee. Most of their services also typically include ongoing financial assistance at no additional cost.

For-profit counselors, on the other hand, are typically not accredited by the NFCC and usually charge high service and monthly fees. They also might not have consumers' best interests in mind, often pushing unnecessary services or making false promises to fix your credit quickly. For-profit counseling agencies include debt settlement companies, which many people mistakenly think offer debt management plans.

When evaluating debt management programs, make sure to choose one offered by an NFCC-certified agency. You can use the NFCC’s agency finder or this list of state-approved counseling agencies by the Department of Justice.

Keep in mind that the Federal Trade Commission (FTC) recommends avoiding companies that ask for money upfront or that don't offer free financial assistance. You should also steer clear of counselors that insist you sign up for a paid service without first exploring additional debt management solutions.

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Debt management plan pros and cons

These are some of the benefits and potential downsides of a debt management plan:

  • The counseling agency will negotiate lower interest rates and monthly payments with your lenders.
  • The agency is in charge of paying your monthly bills, simplifying your finances.
  • As you start making timely payments, you'll gradually improve your credit score.
  • You'll get ongoing financial counseling at no additional cost.
  • It usually only covers unsecured debts, like credit cards or personal loans. Mortgages, student loans and auto loans are not eligible.
  • You may have to pay monthly fees between $20 and $50.
  • It can take between three and five years to repay outstanding debts.
  • You may have to close your credit cards, which can initially lower your credit score.

How does a debt management plan affect your credit

Debt management plans don't directly lower your credit score. However, your counselor might ask you to close your credit cards to stop you from accruing additional debt, and this can impact your score slightly.

Closing credit cards reduces your total available credit and consequently raises your credit utilization ratio, which is the second most important credit scoring factor. This ratio represents how much of your available credit you’re currently using. Experts recommend keeping your utilization ratio below 30% to achieve a good or excellent credit score.

Canceling lines of credit you've had for years can also shorten the average age of your credit history, another factor credit scoring models consider. A shorter credit history can lower your credit score because lenders might think you have limited credit experience.

However, note that the impact of these two factors is temporary and considerably less than making late payments or not paying your bills at all. A debt management plan can help you reduce debt and make consistent, timely payments, which could help your credit score improve over time.

When to consider a debt management plan

A debt management plan may be a suitable option if:

  • You have several unsecured lines of credit, particularly credit card debt.
  • Your cards have high interest rates that make it difficult to pay the principal amount down.
  • You're trying to avoid late payments and collection agencies.
  • Keeping track of multiple monthly bills is becoming difficult.
  • You need professional personal finance assistance to create a budget or negotiate with lenders.

However, keep in mind that not all of your creditors may agree to a debt management plan, especially if they've already sent your account to collections. This strategy may also not be feasible if you don't have enough income to cover your living expenses and meet the plan's terms each month.

What are the alternatives to a debt management plan

While debt management plans are excellent repayment strategies, they might not be the best option, especially if you don't have enough income to pay monthly bills. Here are some other alternatives:

Debt consolidation loans

A debt consolidation loan can streamline your finances by allowing you to combine multiple debts into a single monthly payment.

Once approved for the loan, you can use the funds to pay your credit cards, personal loans or other types of debts. With most of your accounts settled, you'll only have to focus on repaying the debt consolidation loan instead of dealing with several lenders and multiple due dates.

Note that some of the best debt consolidation loans can also offer lower interest charges, potentially saving you money over time.

Balance transfer credit cards

Balance transfer cards allow you to transfer the outstanding balances from your existing credit cards (and sometimes loans) onto a new credit card with a lower interest rate. The best balance transfer credit cards usually offer a 0% APR promotional period of anywhere between 12 to 21 months, which can help you pay off your principal faster.

However, getting a new credit card might not be the best option if you already have a lot of debt or have difficulty getting approved for new lines of credit due to a low credit score.


If you can't meet your payment schedule even after budgeting or getting an additional income source, filing for bankruptcy may be an option. Bankruptcy is a court-ordered process where part of your debt may be forgiven or you can enter a repayment plan with more favorable terms.

The two main options for consumers are Chapter 7 and Chapter 13 bankruptcy. Under a Chapter 7 filing, some of your debt, especially unsecured accounts like credit cards and medical bills, may be discharged. This means that you’re no longer legally liable for the debt and creditors can’t contact you to attempt to collect. However, a court-appointed trustee may sell some of your assets if they’re not protected under bankruptcy exemptions to repay your lenders.

With a Chapter 13 order, you'll enter a court-mandated repayment plan where debts must be repaid over three to five years. If the repayment period ends and you still have outstanding balances from credit card or personal loans, those debts may be discharged. But other debts like student loans and mortgages must still be paid.

If you're considering this alternative, talk to a bankruptcy attorney and a credit counselor first. While bankruptcy can help you avoid lawsuits and collection agencies, it's a last resort that can severely impact your credit history for up to ten years.

Debt settlement

Debt settlement (or debt relief) involves negotiating with creditors to settle your outstanding balances for less than what you owe. It is often considered a viable debt-relief option, but it can actually worsen your financial situation.

There are debt settlement companies that can handle negotiations for you. However, the Consumer Financial Protection Bureau (CFPB) cautions against using this debt-relief strategy as the debt settlement business is often riddled with scams.

Many companies promise to help you avoid lawsuits and debt collectors, but they can't guarantee this as creditors aren't obligated to negotiate outstanding debts. These companies also typically charge expensive fees (around 15% to 25% of the amount settled) and advise you to stop paying your monthly bills, which can significantly impact your credit score.

You can attempt debt settlement on your own. However, this will also negatively impact your score since banks and credit card companies are usually only willing to settle delinquent accounts that are three or more months late. Since your payment history is the most important credit scoring factor, past-due bills will lower your score by 100 points or more.

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What is a Debt Management Plan FAQs

How long is a debt management plan?

Debt management plans usually take between three and five years to complete. However, there are no penalty fees for paying off your plan early, either by increasing your monthly payments or paying it in a lump sum.

How long does a debt management plan stay on your credit report?

Some creditors may flag your accounts as enrolled in a debt-relief program until you settle the balance. This won't necessarily lower your credit score as long as you make timely payments. However, lenders might hesitate to extend you new credit lines since it shows you required professional help managing your debt.

How much does a debt management plan cost?

Nonprofit credit counseling organizations typically charge a setup and monthly fees of around $25 and $50 each. However, your counselor may waive the cost depending on your financial situation.

What is the purpose of a debt management plan?

Debt management plans are designed to help people become debt free and financially savvy while reducing their interest charges and avoiding late payments.

What happens when you enter a debt management plan?

A credit counselor will attempt to negotiate lower interest rates and more affordable monthly payments with your creditors. Once negotiations conclude, you'll make a single monthly payment to the credit counseling agency, and it will be in charge of paying your creditors until the accounts are settled. Your counselor will also evaluate your finances to recommend a budget that helps you keep up with your payment schedule.

Summary of Money’s What is a Debt Management Plan

If you’re struggling with too much debt, a debt management plan could offer some relief. With this debt-repayment strategy, a qualified credit counselor evaluates your finances and negotiates with creditors to lower your interest charges and monthly payments, making your bills more manageable. Your counselor will also offer ongoing assistance and education on managing your finances and budgeting.

Debt management plans can help people with any amount of debt. However, they can take up to five years to complete, so they’re not the best option if you want to pay off debt fast.

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