Understanding Debt Management Plans: A Comprehensive Guide

If you’re struggling with credit card debt, you might want to contact a nonprofit credit counseling agency to get help from a professional. Everyone’s situation is different, but one option could be to use a debt management plan, or DMP. There’s often a setup and monthly fee to participate, but you might save money overall if the credit counselor can help you get fee waivers and interest rate adjustments.

What Is a Debt Management Plan?

A DMP is a debt consolidation and repayment plan that a credit counselor manages on your behalf. Generally, you can include credit cards (and sometimes other unsecured loans) in the DMP and pay off the included debts within three to five years. You might be able to save money and pay off the debt faster than you could on your own if the counselor gets your creditors to lower your accounts’ interest rates or waive fees.

Credit counseling agencies also offer services besides DMPs, including different types of financial education and assistance. They might be able to discuss the pros and cons and help you decide if a DMP is a good fit.

How Does a Debt Management Plan Work?

Although there are debt consolidation and debt repayment strategies that you can do on your own, you’ll need to meet with a certified credit counselor if you want to get on a DMP. Here’s how the process usually works:

Find a Credit Counseling Agency

The first step is to find a reputable credit counseling agency. You can search for local or national organizations through the National Foundation for Credit Counseling or the Financial Counseling Association of America.

Meet with a Credit Counselor

During a free initial meeting with a counselor, you can go over your finances, budget, and goals. The counselor may share several options with you and discuss the pros and cons of a DMP.

The Counselor Meets with Your Creditors

If you decide to enroll in a DMP, the credit counselor will contact your creditors to see if they’ll work with you and the counseling agency. The counselor may also ask the creditor to waive fees, bring past-due accounts current, lower interest rates, or lower minimum payments.

Close Your Included Accounts

You may have to close the credit cards that are part of your DMP and agree not to open or use credit cards while enrolled in the DMP.

Make a Monthly Payment to Your Counselor

You’ll now make a monthly payment to the credit counseling agency, which will forward your payments to the various creditors. Your monthly payment stays the same as you pay off cards—the extra money goes toward paying down the remaining debts faster.

According to Money Management International (MMI), a national nonprofit credit counseling agency, about 24% of consumers who work with one of their credit counselors choose to enroll in a DMP. And 76% of the clients who started a DMP with MMI completed their debt repayment plan. GreenPath, another national nonprofit credit counseling agency, found that 59% of the DMPs their clients closed in 2022 were successfully paid in full.

How Much Can You Save With a Debt Management Plan?

Debt management plans can help you save money by lowering the interest rate on your accounts, getting fee waivers, and helping you stick to a debt-payoff strategy.

But there’s often an upfront fee to set up your DMP, and a monthly fee that you pay the agency to manage your DMP. Those costs can depend on which agency you’re working with and your state’s regulations. However, even with the fees in mind, you might save more than you spend with a DMP.

Here’s an example of how repaying $18,000 worth of credit card debt on your own might compare to using a DMP. We’ll assume that your credit card has a 26% interest rate and that the credit counselor negotiates with your creditor and gets you an 8% interest rate. We look at how repaying the debt on your own with either the same monthly payments or the same repayment period compares to using a DMP fee.

Debt Payoff With and Without a DMP

Making the Same Monthly Payments as a DMP

Paying Off the Debt In the Same Repayment Period

Using a DMP

Starting credit card balance: $18,000

Interest rate: 26% vs. 8%

Monthly payment to pay off the debt in four years: $464 vs. $607 vs. $464 (including DMP fee)

Time to pay off the debt: 7 years and 2 months vs. 4 years vs. 4 years

Total interest paid: $21,740 vs. $11,129 vs. $3,093

DMP fees: N/A vs. N/A vs. $1,185

Total interest and fees: $21,740 vs. $11,129 vs. $4,278

The example is certainly simplified—credit cards have variable interest rates, the amounts might change depending on how many cards you have, and it assumes you don’t take on any more credit card debt. But even with all that in mind, and assuming you’re paying over $1,000 in DMP fees, it still shows how someone might save almost $7,000 compared to paying off the debt on their own.

Additional DMP Insights and Factors That Can Affect DMP Costs

Speaking with a credit counselor—or interviewing several counselors to find one you like—is the only way to know whether a DMP is an option and how much it might save you. But here are a few more industry facts and figures that can give you insight into when a DMP might be a good idea.

Setup and monthly fees can range. The setup fee can be as high as $50, and monthly costs can be up to $75 in some states. MMI says their 2022 averages were $33 for setup fees and $24 for monthly fees—we used those numbers in the example above.

Some people get fee waivers. If you have trouble affording the DMP fees, you might qualify for a fee waiver or reduction.

People often start with about $18,000 in debt. The $18,000 figure above is in line with what both MMI and GreenPath report. However, many people include multiple credit cards in their DMP—GreenPath says the average is five debts.

Interest rate reductions can vary. You might see your accounts’ average interest rates drop to around 7% to 10%. But each of your creditors might offer different rates and there’s no guarantee they’ll lower your rate.

It often takes less than four years to complete a DMP. Most DMPs are set up so you’ll repay all the included debts within three to five years. On average, MMI’s clients who successfully completed their DMPs in 2022 took a little under four years. GreenPath’s clients that completed their plans in February 2023 took an average of three-and-a-half years.

MMI also reportedly saw clients’ credit scores increase by an average of 90 points from the start to the end of their DMP. Although the score increase might not be entirely attributable to the DMP, the higher credit score could lead to significant savings. If you think a DMP could help prevent you from missing payments or, worse, defaulting on your credit card, saving yourself from severe credit score harm could be a major added benefit.

Pros and Cons of Debt Management Plans

Even though DMPs help some people save money, they’re not always the right fit. If you can’t afford to pay off your debts, even with reduced interest rates, then bankruptcy might be on the table as a last-resort option. Or, if you think you can manage other credit card payoff strategies on your own, such as a balance transfer card with a promotional 0% introductory rate, you might have more flexibility if you don’t use a DMP.

A credit counselor should discuss your options with you, but here are some of the important pros and cons of DMPs to consider.

Pros of DMPs

Potentially lower interest rates: The lower rates can help lower your monthly bill. Or, if you pay the same amount, more of your payment will go toward paying off your principal balance.

Waived credit card fees: If you owe credit card fees, your counselor might be able to save you money by getting your credit card issuer to waive them.

Bring past-due accounts current: Rather than having to pay your entire past-due amount at once, your creditors might agree to bring your past-due accounts current after you make several on-time DMP payments.

Fewer monthly bills: You’ll only have to make one payment to the counseling agency rather than several credit card payments.

A plan you can follow: You’ll know exactly how much you have to pay each month and when the debt will be paid off. And you’ll have a professional you can speak with if you have questions or problems.

Cons of DMPs

Only some debts are eligible: DMPs are generally for credit cards, although you might be able to include certain other debts. You often can’t add a secured loan, such as an auto loan, to your DMP. Also, even with credit cards, the creditors don’t have to offer any benefits or agree to put your account into the DMP.

Can’t use credit cards: You won’t be able to use or open a credit card while paying off your DMP. You’ll also have to close all the cards in your DMP, although sometimes you can keep one open for emergencies.

Fees apply: Even if the savings outweigh the fees for many people, review your DMP offer and make sure it’ll benefit you. If you can use alternative strategies to pay off your debt, lower your interest rate or save money, they might cost you less overall.

Review Your Credit Reports and Debts

A credit counselor will want to review your debts and budget, but you can also take this important first step on your own. Get a copy of your free credit report from Experian and look over all your accounts with balances. Then review your credit card and loan statements to determine how much you have to pay each month and the debts’ interest rates. From there, you can start comparing different strategies for paying off debt, including using a DMP to pay off your credit cards.

At O1ne Mortgage, we understand that managing debt can be overwhelming. If you need assistance with your mortgage or any other financial services, don’t hesitate to call us at 213-732-3074. Our team of experts is here to help you navigate your financial journey and find the best solutions for your needs.