In 2024, U.S. household debt reached $17.94 trillion, according to the Federal Reserve Bank of New York. And it’s more than just a number on a page. It’s the quiet stress in the back of our minds, the late-night worry about next month’s bills.
On an emotional level, managing multiple debts can feel incredibly overwhelming. A solid debt management plan can bring clarity, control, and peace of mind. We’re here to guide you every step of the way.
KEY TAKEAWAYS
- A debt management plan consolidates unsecured debts into one monthly payment, typically managed by a nonprofit credit counseling agency that negotiates with creditors for lower interest rates and waived fees.
- Applying for a debt management plan involves assessing debt, researching accredited credit counseling agencies, attending a counseling session, signing an agreement, and making consistent monthly payments through the agency.
- Potential drawbacks of debt management plans include set-up fees and short-term impacts on credit scores. They also generally exclude secured debts like mortgages or auto loans.
- A credit agency with NFCC or FCAA credentials is generally trustworthy and helps you avoid scams or hidden costs.
What is a Debt Management Plan?
A debt management plan is a structured program, usually set up by a nonprofit credit counseling agency or a debt management company. These companies consolidate your eligible unsecured debts into one monthly payment.
Defining Unsecured Debt
Unsecured debt is any debt not backed by collateral. This means that there is no asset (like a car or a house) that a lender can seize if you fail to pay.
Common examples of unsecured debt include:
- Credit card debt
- Payday loans
- Medical bills
Because these debts rely solely on a borrower’s promise to pay rather than tangible collateral, they often have higher interest rates to offset the lender’s increased risk.
How Does a Debt Management Plan Work?
You make a single payment to the agency each month. The agency then disburses funds to your creditors. Because the agency often negotiates with your creditors, you may benefit from reduced interest rates or waived late fees.
Who Needs a Debt Management Plan?
- Individuals who struggle to pay down multiple high-interest debts each month.
According to the 2023 Consumer Financial Literacy Survey from the National Foundation for Credit Counseling (NFCC) and Wells Fargo, 57% of U.S. adults worry they may not achieve their financial goals, with nearly one-third citing too much debt.
- Those who want to avoid more extreme debt management programs like debt settlement.
- People are looking for a structured way to repay debt with professional guidance.
How to Apply for a Debt Management Plan?
Now that we’ve defined what a debt management plan is let’s dive into the application process. Applying for such a program would generally involve the following steps:
1. Assessing Your Debt Situation
Before you choose a debt management plan, take a complete inventory of your debts. Include balances, interest rates, and monthly obligations. This helps you see if you need a structured plan or if other solutions, like a debt consolidation loan, might be more straightforward.
Start by requesting a free copy of your credit report to ensure you have a complete picture of all outstanding debts. Making a simple spreadsheet or using a budgeting app can help keep track of payments.
2. Research Debt Management Companies
Look for reputable agencies accredited by the National Foundation for Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA). Accredited agencies follow strict ethical standards and are more likely to offer reliable counseling.
Read reviews, check their BBB ratings, and verify if they are registered within your state. Watch out for red flags like hefty upfront fees, guaranteed credit score boosts, or ‘too good to be true’ promises.
3. Schedule a Counseling Session
During your initial counseling session, you will likely discuss your total debt, credit score, budget, and financial goals. Reputable credit counselors will provide free resources on managing debt and evaluating if a debt management plan is right for you.
Before the session, gather your most recent pay stubs, credit card statements, loan documents, and a rough budget. Most sessions last about 30-60 minutes, during which you will receive an overview of a personalized action plan.
4. Formalize a Debt Management Plan Agreement
If you move forward with a debt management plan, expect to sign an agreement with a counselor. Once signed, a counselor will begin negotiating with creditors on your behalf. The negotiations typically aim to reduce interest rates, waive late fees, or adjust monthly payments.
The agreement outlines the monthly payment amount, agency fees (if any), the total duration of the plan, and any closures of credit card accounts.
5. Start Making Payments
After the plan is set, you will make one monthly payment to the agency, which will then distribute funds among your creditors. Stick to this schedule to avoid any default on your new arrangements.
Most agencies offer an auto-pay option that automatically withdraws your debt management plan payment from your bank account on a set monthly date.
6. Monitor Your Progress
Review your account balances and credit reports at least once a month or quarterly using a reputable credit monitoring service. This helps ensure creditors are updating your information accurately.
If your income changes or you face an emergency expense, contact your counselor immediately to see if your monthly payment can be adjusted.
Pros of Using a Debt Management Plan
Repaying debt without a structured plan can feel like swimming upstream. So, here are some tangible ways a debt management plan can help ease that burden.
Reduced Interest Rates and Fees
When you enroll in a debt management plan, credit counseling agencies often negotiate lower interest rates and may succeed in having specific penalties waived. This can help you save, especially if your rates are above the national average.
With decreased interest rates, more of your monthly payment goes toward your principal. This means you’ll pay off debts faster, shaving months (or even years) off your repayment timeline.
Single Monthly Payment
A debt management plan consolidates multiple bills into one monthly payment. You just track a single outflow rather than juggling various due dates and interest rates.
A debt management plan minimizes the chances of administrative errors and helps you feel more in control of your finances.
Structured Path to Repayment
A typical debt management plan lasts three to five years and outlines exactly when you can expect to be debt-free (assuming you meet your monthly obligations).
Credit agencies not only help you establish a plan for a debt-free life, but they also support you in sticking to it. They often provide regular check-ins to assess your progress and offer personalized guidance tailored to your financial needs.
Cons of Using a Debt Management Plan
While a debt management plan can ease your repayment process, it’s not without its downsides. Before signing any agreement, weigh these potential drawbacks against the abovementioned benefits.
Fees and Possible Hidden Costs
Even nonprofit credit counseling agencies may charge you a setup and monthly service fees. Some debt management plans allow you to waive fees if you meet specific income requirements, but this isn’t guaranteed. We recommend requesting a detailed breakdown of all costs before committing.
Additionally, while most reputable debt management companies are transparent, some might include administrative costs that aren’t obvious at first glance. These charges can reduce the savings you expect from lower interest rates. Always read the fine print and ask questions if any part of the fee structure is unclear.
Credit Score Impact
Once you enroll, creditors may mark your account as managed by a credit counselor. Although not as damaging as a late payment or default, this notation can raise red flags for future lenders who might view you as a higher risk.
Most debt management plans require you to stop using existing credit cards and avoid opening new lines of credit. While this can be a solid strategy for preventing further debt, it also means you’ll have less financial flexibility in emergencies or for big purchases.
Limited Types of Debt
A debt management plan typically covers unsecured obligations like credit cards, medical bills, and personal loans. If you’re grappling with secured debt such as a mortgage or auto loan, a debt management plan won’t help you refinance or reduce those payments.
Additionally, while some debt management companies offer guidance on managing student loans, many debt management plans do not include them. Federal student loans may have alternative repayment or consolidation options that could be more beneficial than incorporating them into a general plan.
Alternatives to Using a Debt Management Plan
Not everyone benefits from a debt management plan. If you’re looking for ways to manage debt beyond a debt management plan, here are five approaches to consider:
Debt Consolidation Loan
A single loan can roll multiple debts into one payment, ideally at a lower interest rate. You typically need a fair or better credit score to qualify, and extending the loan term may increase the total interest paid.
Debt Settlement
This involves negotiating with creditors to pay a lump sum for less than you owe. It can reduce debt dramatically but often requires you to be behind on payments first. The forgiven portion might be taxed, and it can deal a heavy blow to your credit score.
If you choose this method, beware of scams and, if possible, consult a professional. The FTC recently announced it has secured over $5 million in refunds for consumers harmed by a bogus debt relief scheme that misled them into making large, unsustainable lump-sum payments as part of its debt settlement process.
Personal Budgeting and Side Hustles
Sometimes, it’s best to handle debt yourself. Cutting expenses, raising income through side gigs, and sticking to a strict budget can gradually lower your balances without added fees or credit implications.
Our article on How to Get Out of Debt offers practical tips on building a DIY repayment strategy.
Refinancing
For mortgage or auto debt, refinancing at a lower interest rate can free up money to pay other obligations. Although closing costs may apply, you might save considerably over time, especially if your current rates are high.
Debt Management Plan FAQs
Deciding whether a debt management plan is right for you can lead to numerous questions. Here are some of the most common ones people ask.
Is a Debt Consolidation Loan the Same as a Debt Management Plan?
Not quite. Although both aim to simplify and lower monthly payments, debt consolidation loans involve borrowing a new loan to pay off existing debts.
A debt management plan typically involves negotiating directly with your existing creditors rather than taking on new debt.
What’s the Difference Between a Debt Management Plan and Bankruptcy?
Bankruptcy is a legal proceeding that can discharge some or all of your debts but carries severe consequences for your credit score and financial future.A debt management plan aims to repay debts in full, often at negotiated terms, without the legal ramifications and long-term credit damage typically associated with bankruptcy.
Can My Debts Be Written off Through a Debt Management Plan?
Generally, a debt management plan doesn’t include automatic debt forgiveness, unlike some forgiveness programs. However, creditors might waive specific fees or penalties to facilitate repayment.
Will My Credit Score Drop if I Enroll in a Debt Management Program?
In many cases, yes. At least in the short term. Creditors may include remarks on your account indicating you’re enrolled in a credit counseling or debt management service.
However, your credit score can recover and improve over time as you consistently make on-time payments and reduce your overall debt.