What Is a Debt Management Plan?

Definition & Examples of a Debt Management Plan

Anxious woman paying bills on laptop

Jose Luis Pelaez Inc / Getty Images


A debt management plan, or DMP, is a repayment plan set up by a credit-counseling agency to help consumers take control of unmanageable debt.

Learn how a debt management plan works and identify its pros, cons, and alternatives to determine whether it's the appropriate solution for your debt woes.

What Is a Debt Management Plan?

A DMP arranged through a credit counseling agency establishes a new payment schedule and terms that can help you pay down your debt faster and more affordably.

It's typically offered to borrowers whom a credit counselor has deemed otherwise unable to repay their loans based on a review of their finances. A debt management plan generally covers unsecured debt (loans not secured by collateral) such as credit card debt or medical bills but not secured debt, such as mortgages and auto loans.

  • Acronym: DMP

Some DMPs also exclude certain types of unsecured debt, such as student loans.

How a Debt Management Plan Works

If you can't make your monthly credit card or loan payment or have too much debt or too many debts to know where to begin, you may want to explore a DMP to avoid defaulting on your loan or declaring bankruptcy, both of which can have a negative impact on your credit for several years.

With a debt management plan, you work with a credit-counseling agency to arrange a new repayment plan that alters your payment terms and schedule to help you better tackle your debt.

For example, let's say that Bud is struggling with debt incurred from multiple credit cards from multiple issuers. He seeks relief from a DMP as follows:

  1. He pays a visit to a reputable local credit-counseling agency. A certified credit counselor comprehensively reviews his finances and recommends a debt management plan, available for a low monthly service fee.
  2. The agency negotiates a new payment plan with Bud's creditors on his behalf, which results in a lower interest rate, the waiver of certain fees, and the repayment of his debt in four years. Bud's agency tells him exactly how much he'll pay each month.
  3. Bud makes a single payment every month to the agency along with the service fee. They take the payment and distribute it among his multiple creditors to pay down his credit card debt.
  4. With the help of the debt management plan, he becomes debt-free in four years.

Advantages and Disadvantages of Debt Management Plans

  • Single monthly payment

  • More affordable payments

  • Become debt-free faster

  • Built-in discipline

  • Credit score not vulnerable

  • Illegitimate agencies and DMPs exist

  • Not all debts are covered

  • Favorable repayment terms not guaranteed

  • Fees apply

  • Late payments are damaging

Advantages Explained

The upsides of a debt management plan include:

  • Single monthly payment: A DMP consolidates the multiple payments you might be making to multiple creditors into a single monthly payment, resulting in a more manageable, easy-to-remember payment schedule.
  • More affordable payments: In negotiating with your creditors, a credit-counseling agency can often help you secure a lower interest rate and get certain fees waived, reducing your financing charges and overall borrowing costs.
  • Become debt-free faster: Under a typical debt management plan, you'll pay off your debt in three to five years. Most DMPs take four years at a minimum, however. You’ll get both financial and stress relief knowing there’s an end-point to your financial instability and to collection calls and letters.
  • Built-in discipline: Many DMPs require you to make regular, timely monthly payments to your agency and to stop using credit or applying for new credit during the repayment period, so it should be easier to stay on track.
  • Credit score not vulnerable: As long as you make your payments on the debt management plan on time, your credit score generally won't take a hit.

Disadvantages Explained

The downsides of a debt management plan are:

  • Illegitimate agencies and DMPs exist: Not all agencies are whom they purport to be, so not all DMPs do what they claim to do. For example, a dubious agency may offer you a lower interest rate that a creditor never agreed to. Worse, some may never pass along your monthly payment to the creditors, which can incur late payments on your credit reports and associated late fees. That's why it’s important to choose reputable agencies, contact your creditors to ensure they agree to the concessions the agency offers, and read your monthly statements to ensure your agency is making the promised payments to creditors on time.

Choose a credit-counseling agency from the U.S. Department of Justice's list of approved agencies to ensure that your DMP is handled ethically and responsibly.

  • Not all debts are covered: A DMP typically doesn't cover secured debt; if you struggle with that type of debt, you won't be helped by such a plan beyond receiving some basic guidance from your credit counselor.
  • Favorable repayment terms not guaranteed: There's no guarantee the credit counselor can get your interest rate reduced or fees waived.
  • Fees apply: Although fees vary by agency and state, expect to pay a one-time setup fee of anywhere from $30 to $50 and a monthly service fee of $20 to $75. Although the monthly service fee may be no more than your cellphone bill, it represents an added cost, which can be a barrier to those already deep in debt.
  • Late payments are damaging: If you're late on a payment while on your debt management plan, you could not only derail the plan but also lose benefits such as a lower interest rate or waived fees. Plus, creditors who previously forgave late payments made before enrolling in a DMP may not forget those made while on a DMP. This can result in late payments being reported in your credit report, as well as late fees.

Do I Need a Debt Management Plan?

To determine if a DMP is right for you, first contact a credit-counseling agency (through the Department of Justice website mentioned earlier) to get a comprehensive review of your finances. Be honest with the counselor about the amount of debt you carry and your creditors, income, and expenses.

The credit counselor will help you budget your income and expenses and get advice on your debt, including whether a debt management plan is warranted.

In general, a debt management plan makes sense if you've reached a point where you can't manage your unsecured debt on your own and would benefit from the expert advice, modified repayment terms, and accountability provided by a DMP, which can be had without taking a negative credit hit. But you should be prepared to stop applying for or using credit for four years or longer as required by the plan and be able to afford the agency's fees.

If you're struggling with secured debt, or a DMP plan is cost-prohibitive, you may want to consider alternatives.

Debt Management vs. Debt Management Plan

Irrespective of the size of your debt, its always a good idea to manage it so that it doesn’t spin out of control. Debt management is simply an exercise in understanding your debt obligations, budgeting to keep payments on schedule, prioritizing which debt to pay off first, and ensuring it doesn’t get unmanageable.

Managing your debt yourself is different from a debt management plan that is created by a credit counseling agency for you when you’re struggling to pay what you owe.

Another key difference between the two is that while managing your debt, you take into account all types of obligations, and a DMP can only be used to pare down unsecured debts.

Your personal debt management exercise works with the existing terms and payment schedule of your debt, whereas under a DMP, your credit counseling agency may negotiate more affordable new payment schedules and terms on your behalf.

Also, in managing your debt, you’re making payments to your creditors directly; under a DMP, you make your payment to the credit counseling agency.

Alternatives to a Debt Management Plan

Two other options used to bring debt in check are:

  • Debt consolidation: This can involve getting a new consolidation loan or balance transfer credit card to consolidate all your existing balances, both of which can result in a single monthly payment, and ideally, a lower interest rate. The downside is that taking out a new loan or credit card results in a hard inquiry on your credit report, which can ding your credit score temporarily.
  • Debt settlement: With debt settlement, a debt-settlement company negotiates with your creditors to reduce or eliminate some or all of your debt. While this may sound like a great option, debt settlement has the potential to hurt your credit score, as you typically stop making payments to creditors during negotiations with creditors, which can result in late payments.

Key Takeaways

  • A debt management plan is a repayment plan set up by a credit-counseling agency to help you take control of your debt.
  • It results in a single monthly payment, and often, a lower interest rate and other favorable terms that can make debt repayment more affordable and faster, often making you debt-free within three to five years.
  • It's worth considering if you're overwhelmed by unsecured debt, but you'll have to be disciplined about making your payments on time and to live without credit while you're on the plan.
  • Debt consolidation and debt settlement are alternatives to consider, but both can potentially impact your credit.