What is a Debt Management Program?

What is a debt management program?

A debt management program or plan (also called a DMP) is a repayment plan designed to help you eliminate high-interest-rate credit card debt. You enroll in the program through a credit counseling agency that helps you find a monthly payment that works for your budget. It’s not a loan – but a better, more efficient way to pay off your credit cards and other unsecured debts. Think of it like a professionally assisted consolidation and repayment plan.

A debt management program typically takes about three to five years to complete.

Debt management programs can reduce total credit card payments by up to 50%. It can lower the interest payments applied to the debt to 0%-10%.

Debt management clients receive more than help reducing their interest charges.

A DMP will set a reasonable monthly payment for the consumer’s budget. Debt management clients receive financial educational materials, access to workshops, and webinars to avoid returning to credit card debt later.

It’s an industry regulated by the Federal Trade Commission, and many credit counseling agencies adhere to ethical guidelines set by the National Foundation for Credit Counseling.

How debt management plans work

A debt management program starts with a free debt analysis. A certified credit counselor will ask questions to determine how much – and what types of debt – you have.

They must uncover how much income is needed for essential spending like rent, food, and car payments. Then, they can determine your discretionary income, all left when your life’s needs are deducted. This assessment will help identify whether a debt management program fits you and your budget well.

Here’s an in-depth, step-by-step guide to how a debt management program works:

1. Debt analysis

• Review your income, expenses, and debts.
• Help you create a realistic budget.
• Determine if a DMP is the right solution for your financial situation.

A certified credit counselor will review your debts, credit, and budget. They may find you’re not eligible for a debt management program. By law, certified credit counselors must offer debt relief options that best fit your unique financial situation. They won’t push to enroll you in a debt management program if they uncover your budget and financial situation is not a good fit.

If a DMP is the best choice for your unique financial situation, the counselor works with you to find a monthly payment that will fit your budget. Fees are included in the monthly payment, so you don’t need to worry about an extra bill.

2. Negotiation with creditors

A debt management program aims to help reduce interest charges on credit cards and other unsecured debts, often keeping people stuck in debt. It’s not always the debt’s principal keeping them trapped, making payments that don’t dent the credit cards’ balances.

If the debt analysis reveals you are a good candidate for a DMP, and you decide to enroll, the credit counseling agency contacts each of your creditors to negotiate three things:

• To get your creditors to accept payments through the program
• Reduce or eliminate the interest charges on your accounts
• Waive late fees or penalties
• Stop future penalties and penalty fees
• Create a manageable monthly payment plan.

These agreements help make your debts more affordable and accelerate your payoff timeline.

3. Consolidated monthly payment

The nonprofit credit counseling agency negotiates with creditors to lower interest rates, eliminate late fees, and establish a repayment plan. Your program starts once all your creditors agree and the terms are finalized.

You’re responsible for making one payment to the credit counseling agency. The credit counseling agency distributes the funds to your creditors on your behalf.

Once you make a monthly payment to the credit counseling agency, the agency distributes the funds to your creditors as agreed upon in the terms.

4. Ongoing support

The debt management plan is designed to help you stick to a budget and avoid getting back into debt. The nonprofit credit counseling agency will ensure debt collectors stop calling and harassing you. Your credit counselor will provide guidance and support throughout the program. Those enrolled in a debt management program receive free financial educational materials, webinars, and workshops to avoid falling back into credit card debt later.

5. Graduation

A debt management program typically takes about three to five years to complete. You’ll graduate from the program debt-free when all your enrolled debts are paid off. This milestone often comes with improved financial habits and a better credit profile.

Which debts qualify for a debt management program?

Credit cards

A DMP is primarily designed to help you find relief from credit card debt. This includes:

• General purpose credit cards, like Capital One and Chase
• Charge cards, such as American Express
• Store credit cards, such as Amazon, Lowe’s, and department stores like Macy’s

See the full list of over 1,600 creditors that Consolidated Credit works with »

Unsecured debts

You can also include most other types of unsecured debt, including:

• Personal loans
• Consolidation loans
• In-store credit lines for furniture and electronics

You cannot include student or secured loans, such as a mortgage or auto loan. In some cases, you may be able to include payday loans. However, this depends on whether the payday lender agrees to allow you to include their account in the program.

Collection accounts

You may also be able to include collection accounts for unpaid medical bills, service contracts, and utilities.

However, these types of accounts do not have interest charges, so you lose one of the primary benefits of enrolling. Still, if you want to get all your collection accounts paid and roll them into the program, the counseling team can contact the collectors to see if those debts can be included.

What debts cannot be included in a DMP?

You cannot include student loans or any secured debt, such as a mortgage or auto loan. In some cases, you may be able to include payday loans. However, this depends on whether the payday lender agrees to allow you to include their account in the program.

“Priority debts” like child support, court judgments, tax debts, and utility bills will not qualify for a debt management program. Any criminal fines, court-ordered debts, or overpaid government benefits will not qualify in a DMP.

Who should consider a debt management program?

People struggling to keep up with multiple credit card payments or high interest rates, and are ready to stop using credit cards and commit to a fixed repayment plan. A debt management program may be a good option for individuals who:

• Are struggling to manage multiple high-interest debts.
• They have a steady income but need help organizing their payments.
• Want to avoid bankruptcy or debt settlement.

Comparing debt management program pros and cons

Benefits of a debt management program:

• Efficient payments and simplified budgeting.
• Lower interest rates save money over time.
• Reduced creditor calls and collection actions.
• A clear pathway to becoming debt-free.

Debt management programs can reduce total credit card payments by up to 50%. It can lower the interest payments applied to the debt to 0%-11%. Debt management clients receive more than help reducing their interest charges. A DMP will set a reasonable monthly payment for the consumer’s budget.

What are the downsides of a DMP?

• Accounts enrolled in the program are usually closed, impacting your credit utilization ratio.
• You must complete the entire program.
• Because DMPs focus on repayment, they don’t reduce the principal balance of your debt.

A debt management program is essential for regaining control of your finances and achieving freedom from high-interest debt. Those struggling with credit card debt and want to improve their money management skills can benefit from a DMP.

Every debt relief solution has its upsides and downsides. The best solution for one person may not fit the needs and goals of another. So, deciding if a debt management program is the right solution depends on goals.

Here are some real numbers for how Consolidated Credit’s program benefits people who enroll:

1. Clients see their total credit card payments reduced by up to 30-50%
2. Negotiated interest rates average between 0% and 11%
3. Most clients complete the program within 36 to 60 payments.

Understanding the credit impact of the program

A debt management program generally has a positive or neutral effect on people’s credit scores.

• There is no negative information that your creditors will report to the credit bureaus when you enroll or graduate from the program.
• All of your credit cards will be listed as paid in full on your credit report, which is the status you want them to have.
• In addition, each payment you make on your DMP will build a positive payment history for those accounts.

From a credit report standpoint, a debt management plan will have an overall positive effect on your credit history. This gives DMPs an advantage over debt settlement programs, which cause a 7-year credit penalty for every debt you settle.

How a debt management plan affects your credit score

There are some minor ways that the program can ding your credit score. Once you complete the program and the credit card companies close your accounts, this can cause a slight drop in your credit score for two reasons:

1. It decreases the number of active accounts you have open, which is a minor scoring factor.
2. If you close your oldest accounts, this can decrease your “credit age,” which is another minor scoring factor.

Credit age and types of accounts collectively account for 25% of the “weight” in calculating your credit score. By contrast, credit history accounts for 35% alone. This is why a DMP is usually positive for most people’s credit. They build a positive credit history, and that generally outweighs any slight point drop from closing some accounts.

However, you may see a slight decrease if your credit score is extremely high when you enroll. If you have excellent credit, make sure you talk to your credit counselor about how the plan may impact you. There may be other solutions that you can use that would be a better fit.

Debt management program results from real clients

As we talk about throughout this guide, a debt management program is just one potential solution you can use to get out of debt. Consolidated Credit’s certified counselors will help you evaluate your budget, finances, and goals to make sure a debt management program is the best option before you enroll.

Here’s a quick look at the number of people we helped enroll in a debt management program last year and the number of people who graduated debt-free. Below the map, you will find some case studies of other people we’ve helped. These demonstrate the money and time you can save using a debt management program in the right circumstances.