Guide to Debt Management Plans (DMPs)

Q: How does a debt management plan work?

Credit counseling agencies offer debt management plans to borrowers struggling with debt. You may contact a qualified credit counseling service and request a free consultation to discuss whether a DMP is right for you. A DMP is typically a fee-based service that charges enrollment and service fees, When signing up for a DMP, you agree to make monthly payments to the counseling agency. The agency may negotiate with creditors on your behalf to lower your interest rates. The agency will then use part of your monthly payment to pay down your eligible debts until you complete the program. A DMP can run for five years or less.

Q: Will a debt management plan affect my credit score?

Failing to make required DMP payments when due may hurt your VantageScore® and FICO® Score. A debt management plan may not hurt your credit if you complete the program in good standing.

Q: Can I still use credit cards while on a debt management plan?

A DMP may restrict your access to credit. This means you may be restricted from using your credit cards while on a debt management plan. The exception to the rule may be secured credit cards, which require upfront security deposits as collateral.

Lantern Comp Guide: Debt Management Plans: Pros and Cons

Sulaiman Abdur-RahmanUpdated October 23, 2023

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

If you’re struggling to pay off debt and need some relief, a debt management plan may be right for you. Debt management plans (DMPs) are tools offered by nonprofit credit counseling agencies to help people pay down their eligible debts.Enrolling in a debt management program is an alternative to declaring bankruptcy. You may sign up for a DMP and make a single payment to a nonprofit agency each month, which the agency distributes to your creditors. DMPs can also help you reduce your interest rates and fees.Below we highlight the pros and cons of debt management programs and explain how they work.

What Is a Debt Management Plan (DMP)?

A debt management plan is a program typically offered by nonprofit credit counseling agencies to help borrowers pay down unsecured debt. A DMP may be right for you if you’re struggling to make minimum payments on your credit card bills but don’t want to file for bankruptcy. Unsecured credit card debt is typically eligible for DMPs, but some debts are not.Generally, the following will happen when you turn to a credit counseling agency to build a DMP:

You’ll meet with a credit counselor to discuss your debts and budget
The agency makes arrangements with your creditors to lower interest rates and/or waive late fees
You pay an enrollment fee and monthly debt payments to the agency
The agency distributes your payments to your creditors

DMP repayment plans typically run for five years or less, and the client is responsible for making monthly payments until completing the program. Your monthly payment amount will cover the DMP service fees and payments to your creditors. Certified credit counselors may offer debt management advice throughout the process.

How Does a Debt Management Plan Work?

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Enrolling into a DMP allows a credit counseling agency to work on your behalf and make arrangements with your creditors. You can contact a reputable credit counseling agency and request a free counseling session before paying any fees to a DMP.The way DMPs typically work is you make monthly payments to the counseling agency for up to five years, and the agency uses those funds to pay down your eligible debts in full. Clients who sign up for a DMP may see some relief on finance charges. That’s because DMP counselors may negotiate with your creditors to lower your interest rates and waive any late fees.When you include credit card accounts in a DMP, your creditors will typically close those accounts. DMPs may also restrict your ability to open new credit or loan accounts until you complete the program. Depending on the terms of your agreement, you may not be able to apply for a credit card or unsecured personal loan while enrolled in a debt management program. You may have limited or no access to unsecured credit cards while enrolled in a DMP.You may apply for secured auto loans if you need to buy a car or student loans to pay for higher education, but many unsecured forms of open-end credit or closed-end credit may be off limits until you complete your DMP.

Pros and Cons of Debt Management Plans

The below table highlights some of the pros and cons of DMPs:

Pros of DMPs	Cons of DMPs
Credit counselors may work on your behalf	May restrict your access to credit
May reduce your interest rates	May charge a one-time enrollment fee, and your monthly payment may include service fees up to $75
May waive your late fees	Unlike debt settlement, none of your principal is forgiven
May reduce or stop debt collectors from contacting you	Debt collectors may continue to contact you during the first 90 days of your DMP
May provide an alternative to bankruptcy if you’ve fallen into delinquency	Some of your debts may not be eligible for the program
May help you become debt-free	You may lose your program benefits if you fail to make a required payment when due

Pros of Debt Management Plans

To recap, here are some pros of DMPs:

Credit counselors may work on your behalf
May reduce your interest rates
May waive your late fees
May reduce or stop debt collectors from contacting you
May provide an alternative to bankruptcy if you’ve fallen into delinquency
May help you become debt-free

Cons of Debt Management Plans

As highlighted in the above table, here’s a recap of DMP cons:

May restrict your access to credit
May charge a one-time enrollment fee, and your monthly payment may include service fees up to $75
Any principal you owe is typically not forgiven
Some of your debts may not be eligible for the program, such as student loans and secured auto loans
Debt collectors may continue to contact you during the first 90 days of your DMP
You may lose your program benefits if you fail to make a required payment when due

Choosing a Credit Counseling Agency

The U.S. Department of Justice has an extensive list of approved credit counseling agencies within each state and U.S. territory. Searching the DOJ list can help you find a reputable credit counseling agency that offers DMP services. Reputable credit counseling agencies will have qualified debt management experts certified by a legitimate and appropriate organization. For example, the National Foundation for Credit Counseling (NFCC) has a robust credit counseling certification program. You can look for credit counselors with NFCC certification or something equivalent.Most of the reputable credit counseling agencies are nonprofit organizations, according to the Federal Trade Commission. Certified credit counselors can provide you with key insights on the following topics:

Debt consolidation. Credit counselors may advise you about the pros and cons of using a debt consolidation loan.
Debt avalanche. Credit counselors may advise you about the pros and cons of using the avalanche method for repaying your debts. This method focuses on paying off the debt with the highest interest rate first.
Debt snowball. Credit counselors may advise you about the pros and cons of using the snowball method for repaying your debts. This method focuses on paying off your smallest debts first.
Earning interest. Credit counselors may provide you with expert money management advice, including how to earn interest with a high-yield savings account.

Choosing a nonprofit credit counseling agency from the DOJ’s approved list may help you avoid illegitimate vendors. Some of the less reputable organizations may be motivated by profit, and some may operate without any certified credit counselors on staff.

Getting Started with a Debt Management Plan

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Here are the steps you may take to enroll into a DMP:

Contact a reputable credit counseling agency and request a free counseling session. Such sessions may be conducted online, via telephone, or face-to-face at a physical office.
Authorize the counseling agency to access your credit report if you’re interested in a more personalized session. Credit counselors may run a soft credit check to view your credit report without impacting your credit score.
Gather information about your debts and finances. This includes credit card statements, bank account statements, and pay stubs.
Participate in a counseling session with a certified credit counselor. This may help you determine whether a debt management program is right for you.
Sign up and enroll into a DMP if you agree with the terms and conditions. The agency may charge a DMP service fee as part of your monthly payment until you complete the program.

Sticking to the Plan

It’s important to stick with your DMP as a paying client. Some of your benefits may include reduced interest rates, but you may lose these benefits if you fail to make a required DMP payment when due.Automating your payments may help you complete your DMP in good standing. DMP repayment plans typically run for five years or less, but clients may have the option of paying the plan off early without penalty.

The Takeaway

A debt management plan may benefit borrowers who’ve fallen into delinquency and need some relief. Enrolling into a debt management program and working with a certified credit counselor may reduce your interest rates and waive your late fees. Credit counselors may also give you tips on budgeting.

Debt Management Comprehensive Guide

Note: This article is part of a larger Lantern by SoFi comprehensive guide. For more information on debt management, see the remaining Lantern by SoFi chapters below:

Frequently Asked Questions

How does a debt management plan work?

Will a debt management plan affect my credit score?

Can I still use credit cards while on a debt management plan?

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About the Author

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman writes about personal loans, auto loans, student loans, and other personal finance topics for Lantern. He’s the recipient of more than 10 journalism awards and served as a New Jersey Society of Professional Journalists board member. An alumnus of the Philadelphia-based Temple University, Abdur-Rahman is a strong advocate of the First Amendment and freedom of speech.

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