Debt Management Plans: Everything You Need to Know (2024)

A debt management plan is a tailored strategy to help you repay outstanding debt and financial obligations without using a new loan. Typically, credit counseling agencies work with creditors on your behalf to determine a debt management plan that fits your financial circ*mstances. Here’s how debt management plans work and how to decide if one is right for you.

Pros and Cons of a Debt Management Plan

A debt management plan can help reduce your debt and strengthen your finances, but it’s not for everyone. This strategy has both upsides and downsides to keep in mind when determining if it’s right for you.

Pros Explained

• Structured repayment plan: You’ll receive a tailored plan that takes into account your specific financial situation, ensuring you'll be making payments you can afford. That way, you can get your finances on track.
• Pay off debt sooner: With a new payment plan, you can pay off your debt sooner than if you were to only make minimum payments or pay when you could. This can help improve your credit score as well as save you money on the total interest you pay.
• Potentially lower interest rates or save on fees: When your credit counselor crafts your plan, they may negotiate the terms of your debt. That includes working on your behalf to lower interest rates, get charges removed, or have fees waived. This helps in reducing the total amount you owe to your creditors.

Cons Explained

• No new credit allowed: Most debt management plans have a requirement that you don’t open new lines of credit or loans while repaying your debt. So if you want to take out a car loan or mortgage, you may not be able to under a debt management plan.
• Takes time to complete: While you could pay your debt off sooner than you would without a plan, it could still take time to pay off all your debt in full. This may hold you back from other financial goals, like buying a home or making another large purchase.
• Not all debt is included: While some of your creditors may agree to your plan, not all of them will—nor are they required to. This means while you might have a structured plan for some of your outstanding debt, it may not include all of it. For instance, credit card debt may be included, but home or auto loans may have to be paid separately.

How Debt Management Plans Work

Credit counseling agencies review your finances and then help you negotiate and potentially reduce your outstanding debt. You’ll make one monthly payment to the agency, and then they will pay your creditors. Generally, you will have to pay an initial and monthly fee.

With a debt management plan, it can take a few years until all your outstanding debt is paid in full. You usually won’t be able to open new lines of credit or take out new loans, including credit cards, auto loans, and mortgages while under the plan. In some cases, you may have to close your accounts.

Eligibility for a Debt Management Plan

Not all debt is eligible for a debt management plan. Often, only unsecured debt, such as personal loans or credit card debt, is eligible for a debt management plan. Other types of debt, like a mortgage or auto loan that are backed by collateral, may not qualify.

Creating and Implementing a Debt Management Plan

Not all credit counseling agencies are accredited and trustworthy. If a company is promising quick results and requires an upfront payment, look elsewhere. You can often find a nonprofit credit counseling agency through your bank or local consumer protection agency. A good counselor will spend significant time reviewing your personal situation and offer you several options.

Here are the main steps to take to establish a debt management plan with a reputable credit counseling agency:

1. Check eligibility: Consult with a credit counseling agency to see if you’re a good fit for a debt management plan. A credit counselor will review your financial situation to see if you can qualify. Even if a debt management plan isn’t the right fit for you, a credit counselor should help you find other debt relief options and offer you educational resources.
2. Create a debt management plan: Your counselor will craft a plan that fits your finances. You’ll make one payment every month to the credit counseling agency, which will distribute it to all of your outstanding creditors. That amount may include an administrative fee for your counselor. Read over your agreement to make sure it actually suits your needs before you agree to anything.
3. Put your plan to work: Your agency will contact creditors and lenders on your behalf and negotiate outstanding fees or charges to try to lower the total amount you owe. While not all creditors are required to agree with the negotiations, your credit counseling agency will work on compromises.
4. Pause or cancel credit obligations: You’ll likely have to close any credit cards that are in your debt management plan. You may also have limited access to opening up new lines of credit or loans.
5. Make your payments: You’ll make monthly payments as required. It could take a few years to repay all of your outstanding debt, depending on the size of your debt and payments.

Is a Debt Management Plan Right for You?

You might want to get a debt management plan if:

• You have a lot of outstanding unsecured debt, like credit card debt.
• You’re carrying a lot of debt with high interest or fees.
• You are making minimum payments, but your debt is not decreasing due to interest.
• You have trouble making minimum payments on your outstanding debt each month.

You may want to look into other types of debt relief if:

• You have secured debt or other types of debt that wouldn’t qualify for a debt management plan.
• You have some credit card debt but can afford the minimum payments every month.
• You want to make a large purchase within the next few years, like a home or car.
• You aren’t ready to stop using credit cards.

Alternatives to Debt Management Plans

While debt management plans can offer significant help with reducing your debt, they are not necessarily the best solution for everyone. Consider some alternatives as you work on your debt repayment strategy.

Debt Consolidation

If you have many different types of outstanding debt, like credit cards and secured loans, you may want to try debt consolidation.

Debt consolidation is when you take out a loan to pay off your outstanding debt and then make payments on your new loan. This may be helpful if you know how much to borrow as a lump sum and can get a lower interest rate than what you’re paying right now on your outstanding debt.

If you have credit card debt, you may want to look into 0% annual percentage rate (APR) balance transfer credit cards. With a balance transfer, you move over funds from one credit card (or more) onto a card that has a promotional 0% APR for a set amount of months, such as 12 or 24 months. With no interest growing on your balance, you can pay off your credit card faster because your full payment will go toward your principal. You’ll also save more in total interest.

Bankruptcy

If your debt is too much to handle, you may want to explore bankruptcy. While bankruptcy won’t wipe out all your debt obligations, it could help get it restructured and set up a repayment plan.

There are a few different options for bankruptcy, including Chapter 7 and Chapter 13. Chapter 7 is liquidation, where all your assets are liquidated to pay off your outstanding debt. Some other debts may be wiped out completely. Chapter 13 reorganizes your debt, but you’ll get to keep your assets, such as your home, in the process.

Chapter 7 can take a few months to get through, whereas Chapter 13 could take a few years to finish. A bankruptcy can stay on your credit report for seven–10 years, depending on the option you choose.

The Bottom Line

A debt management plan can provide substantial debt relief to many people without the need for a new loan, but it’s not necessarily the best option for everyone. The best method for reducing your debt load will depend on a number of factors, including your income, amount of debt, and credit score. Weigh the pros and cons of all your options for paying off debt, perhaps with the help of a financial advisor, before you determine which one is best for you.