What Is a Debt Management Plan? Here's What You Should Know

A debt management plan (DMP) is a structured repayment program, set up by a nonprofit credit counseling agency, that combines multiple unsecured debts into one manageable monthly payment. It’s not a loan and doesn't erase outstanding balances. Instead, it helps you pay off debt in three to five years without filing for bankruptcy.

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Key Takeaways

• Debt management plans are structured repayment programs offered through credit counseling agencies that consolidate unsecured debts into one monthly payment made over three to five years.

• Your counselor negotiates with creditors to lower your rates and fees, but you may need to close credit cards and avoid new credit during the program.

• Set-up fees usually run $25 to $75 and monthly fees range from $25 to $100, though costs and discount programs vary by agency.

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How a Debt Management Plan Works 

A debt management plan starts with a free or low-cost session with a certified credit counselor. They'll review your income, expenses and debts to figure out if a DMP is the right move.

If so, the counselor negotiates with your creditors to drop interest rates, waive fees and combine remaining balances into one more manageable monthly payment. You’ll make this payment each month to the credit counseling agency, which divides up the funds and pays each creditor the agreed-upon amount for you.  

Generally speaking, only unsecured debts — that is, debt not backed by collateral, like a home or car — are eligible for a DMP. These debts may include:

• Credit cards

• Personal loans

• Medical bills

• Some older collection accounts

• Past-due utility payments

• Payday loans

DMPs exclude secured debts, like mortgages, auto loans, home equity lending products and secured personal loans, along with other debts including student loans, tax debt, legal expenses, child support and alimony.

DMPs come with a set payoff timeline — most are designed to clear your unsecured balances in 36 to 60 months. 

It's important to note, however, that a debt management program isn't debt forgiveness. Credit counselors don’t negotiate to lower a balance’s principal. Instead, they work to lower your overall monthly payment by getting creditors to offer better terms, like lower rates, waived fees or extended repayment periods.

How Much Does a Debt Management Plan Cost?

A debt management plan costs roughly between $925 and $6,075 over its term. While price varies by agency, most charge a set-up fee and monthly maintenance fees for the program’s duration, with some exceptions for people experiencing significant financial hardship. 

This chart illustrates the typical costs of a DMP and when you’re required to pay them.

Will a Debt Management Plan Hurt Your Credit?

In addition to monetary costs, a DMP can indirectly cause your credit score to drop in the short term by 30 points or so. That's largely because most require you to close any credit cards included in the program — and doing so can lower your credit age and spike your credit utilization rate, two key factors among major credit scoring models. 

Having said that, long-term, enrolling in and following a DMP can improve your credit score as you're re-establishing a solid payment history and lowering your credit utilization. Some participants have seen an increase of 100 points or more over their first three years of on-time payments, according to the National Foundation for Credit Counseling (NFCC).

Credit utilization represents how much of your total available credit is in use. Closing a credit card can up your credit utilization because its credit limit is no longer available. Paying down debt, particularly credit card balances, can lower your credit utilization because you're using a smaller percentage of your available credit.

Is a Debt Management Plan Right for You?

This quick decision checklist can help you determine if a DMP is your best move. 

Choose a debt management plan if:

• You have multiple unsecured debts you're hoping to consolidate. 

• You make a steady income and can afford to make some monthly payment.

• You’d prefer assistance in setting a budget and negotiating with creditors. 

• You want a set payoff date for your debt without taking on a new loan.

Skip a debt management plan: 

• You're dealing primarily with secured or otherwise ineligible debts.

• You’re under severe hardship and can’t commit to any monthly payments.

• You’ll need access to your credit cards — most DMPs require you to close them.

• You qualify for quicker or more affordable debt payoff options, like a 0% balance transfer credit card or debt consolidation loan. 

👉Learn More: Choose the Best Debt Relief Program for You

How To Enroll in a Debt Management Plan

If a DMP sounds right for you, here's how to get started:

• Find an accredited nonprofit agency: Look for one accredited by the National Foundation for Credit Counseling or the Financial Counseling Association of America.

• Schedule a free counseling session: The counselor will review your full financial picture and recommend a DMP, if they feel one will help.

• Review the proposed plan: Check the monthly payment, fees and projected payoff date before you sign.

• Make one payment monthly: Send your payment to the agency on time, every time.

It’s important to be wary of and avoid any agency that’s asking you to pay fees before they've negotiated with your creditors and officially enrolled you in a DMP. Asking for upfront payment is a hallmark of scammers looking to take advantage of people in need of debt relief.

👉Up Next: Debt Relief Scams: How To Spot and Avoid Them

FAQ

Can you negotiate a debt-management-style deal yourself, without an agency?

Yes, you can call your creditors directly to see if they'll waive fees, lower interest or extend due dates to help you avoid missed payments and mounting debts. Many creditors and even service providers, like hospitals or utility companies, may offer hardship programs designed to help borrowers or accountholders get back on track, if you meet eligibility requirements.

What happens if you miss a payment on a debt management plan?

Missing a payment can put your debt management plan — and any waived fees, lower interest rates or extended payment terms — at risk. Your creditors could elect to terminate their participation. Fortunately, most won’t do so for a single missed payment, and your credit counselor may be able to adjust your due date, temporarily lower payments or offer other assistance, if you contact them with enough notice. Keep in mind that missed DMP payments can affect your credit score, as it means your creditor was not paid as agreed.

Do all of your creditors have to agree to join the plan?

No, all of your creditors don't have to agree to join a debt management plan. If they refuse to negotiate or participate, the credit counselor will simply exclude that balance from your DMP's monthly payment. You still will need to manage and pay that creditor separately each month to avoid credit score damage, late fees, potential penalty interest or other financial consequences. 

Can you keep any credit cards open while you're enrolled?

Most DMPs highly recommend that you include and, therefore, close all unsecured credit cards when you enroll in the program. However, they’re often willing to make an exception if you prefer to keep at least one card active. You can discuss this option and the best course of action with your credit counselor before finalizing your plan.

Key Terms

• Debt management plan (DMP): A structured repayment program set up through a credit counseling agency that combines multiple unsecured debts into one monthly payment, typically paid off in three to five years. It isn't a loan and doesn't erase balances.

• Credit counseling agency: Usually a nonprofit that advises you on budgeting and debt, and can set up and administer a DMP by collecting one monthly payment and distributing it to your creditors.

• Unsecured debt: Debt not backed by collateral, such as credit cards, personal loans and medical bills. These are generally the debts eligible for a DMP.

• Secured debt: Debt backed by an asset, like a mortgage or auto loan. Secured debts generally can't be included in a DMP.

• Principal: The original amount owed, separate from interest and fees. Under a DMP, counselors work to lower your overall monthly payment rather than reduce the principal balance.

• Credit utilization: How much of your available credit you're using. Closing cards during a DMP removes their limits and can temporarily spike utilization until balances fall.

• Debt settlement: A for-profit service that negotiates to pay less than you owe. It can stay on your credit reports for up to seven years and often carries more credit risk than a DMP.

Sources

• CFPB. Difference between credit counseling and debt settlement, consolidation or credit repair.

• CFPB. How long does a bankruptcy appear on credit reports?

• FTC. Spot scams while getting out of debt.

• myFICO. How a Debt Management Plan Can Impact Your FICO Scores

• NFCC. Does credit counseling impact your credit scores?

Summary generated by AI, verified by MoneyLion editors

Jacinta Majauskas contributed to the reporting for this article.