How to Choose a Debt Management Plan

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Working with a non-profit credit counseling agency to create a debt management plan can be a worthwhile option if you're struggling with debt. However, just because an agency is non-profit doesn't mean it’s affordable or trustworthy. 

Choosing the right debt management plan means considering factors like cost and reputation. Here's what you need to know about finding and comparing options.

What Is a Debt Management Plan?

A debt management plan is a structured, voluntary agreement between you and a consumer credit counseling agency. The agency aims to help you pay off high unsecured debts like credit cards and medical bills by negotiating account payoffs with your creditors. 

After negotiating on your behalf, your credit counselor creates your debt management plan. Under the plan, you make just one monthly payment to cover all your minimum payments plus the agency's fee. The agency distributes payments to each of your creditors based on the plan.

The goal is to gradually pay off your debt within three to five years while minimizing interest and fees. By following a debt management plan, you avoid defaulting on your debts, eliminate collection calls, and avoid filing bankruptcy.

Guide to Choosing a Debt Management Plan

Look for a reputable credit counseling agency, ideally one that's accredited by an industry association like the National Foundation for Credit Counseling or the Financial Counseling Association of America.

You can narrow down your debt management plan options by reviewing credit counseling agency websites. Then, you can schedule a consultation with your top choices to find the best fit.

Factors to Consider When Choosing Debt Management Plans

Here are some key things to consider when you're choosing an organization.

  1. The types of debt you have: A debt management plan is best for dealing with unsecured debts like credit card balances, medical bills, and personal loans. If you have secured debts—tied to an asset, like a mortgage or auto loan—a debt management plan may not be the best option.
  2. Upfront and ongoing costs: You may have to pay an enrollment fee to get started with the debt management plan and a monthly fee for as long as you're enrolled.
  3. Impact to your credit score: Enrolling in a debt management plan requires you to close your credit cards, which can hurt your credit score. Over time, your credit score will recover as you reduce your balance and make your payments on time.
  4. Licenses and certifications: Verify whether the agency is licensed to operate in your state and check to see whether it belongs to an industry association like the National Foundation for Credit Counseling. Confirm whether the employees are also licensed or have industry certifications.
  5. How the debt management plan will help: A counselor should review your debts and your finances, explore options with you, and explain how a debt management plan can help you pay off your debts.

A trustworthy company won't charge you upfront for services you haven't received. 

Compare the Best Credit Counseling Companies

 Company  Accreditation and Memberships  Fees for Credit Counseling and Debt Management Plans
Cambridge Credit Counseling Corp HUD-approved housing counseling agency; member of the NFCC and FCAA Free credit counseling. Initial fee: $40; Monthly fee: $30, on average
Money Management International  Member of the NFCC  Free credit counseling. Initial fee: $33; Monthly fee: $25, on average 
InCharge Debt Solutions  Member of the NFCC; accredited by COA Free credit counseling. Initial fee: $75 (varies by state); Monthly fee: $33, on average 
GreenPath Financial Wellness  Member of the NFCC  Free credit counseling. Initial fee: $0 to $50; Monthly fee: $0 to $75 
Apprisen  Member of the NFCC;
accredited by COA
Free credit counseling. Initial fee: $45; Monthly fee: $45 

How to Get Started With a Debt Management Plan

After you've chosen a credit counseling agency, you'll work with a counselor to create a debt management plan.

  1. Schedule a consultation: During your consultation, you'll meet with a credit counselor to review your finances, including your income, expenses, and debts. Your counselor will help you create a budget and create a debt management plan that balances creditor guidelines with what you can afford.
  2. Wait for the proposal approval: Based on your debt management plan, your counselor will send a proposal to your creditors requesting a lower monthly payment or a lower interest rate, or both. 
  3. Start making payments: Once your creditors have accepted the debt management plan proposal, you'll begin sending monthly payments to the credit counseling agency. The agency will then distribute payments to each of your creditors based on your plan.

To protect your credit score and avoid additional late fees, continue making your regular minimum payments until the proposal is accepted.

Debt Management Plans vs. Debt Relief or Debt Settlement Plans

Debt management plans and debt relief plans are two different approaches to paying off unsecured debts. A debt relief plan is often offered by a for-profit company, which negotiates a lump sum payment lower than your outstanding balance. By comparison, a debt management plan, usually offered by a non-profit organization, helps you pay off balances, in their entirety, with affordable monthly payments.

One downside of following a debt relief plan is that you may be advised by the agency to miss bill payments and direct your funds into an escrow account instead. This can harm your credit score and lead to collection calls and lawsuits. A debt management plan is designed to keep your accounts current and in good standing, as long as your payments are on time.

Debt forgiven under a debt relief plan is considered income by the IRS, and is taxable.

What Are the Alternatives to Debt Management Plans?

A debt management plan can be an effective way to pay off debt, but it's not for everyone. Here are some alternatives:

  • Consolidate your debts with a debt consolidation loan. Combining your balances with a single loan can simplify your debt repayment. You can potentially lower the interest rate and monthly payment making it easier to pay off your debt.
  • Transfer balances to a low or 0% interest rate credit card. This can help you pay off debt faster and save money on interest, if you pay off the balance before the promotional rate ends.
  • File bankruptcy. While bankruptcy is a serious decision that should be considered only as a last resort, it can provide relief from overwhelming debt. Keep in mind that not all debts can be discharged in bankruptcy and filing can damage your credit.
  • Create your own debt repayment plan. Create and follow a budget to allocate money to paying off your debts, following either the avalanche method (highest interest-rate debt first) or the snowball method (lowest balance debt first).

Who Regulates Debt Management Companies?

The Federal Trade Commission regulates debt management companies. Your state attorney general has the authority to take legal action against companies that violate your rights, too. Additionally, the National Foundation for Credit Counseling and the Financial Counseling Association of America are industry associations that set guidelines for credit counseling agencies.

Can You Use a Credit Card While on a Debt Management Plan?

No, you can't use a personal credit card while you're on a debt management plan. Creditors generally agree to lower your interest rate or waive fees under the condition that you stop using your card. They may cancel the agreement if you open a new card or make new purchases on an existing one.

How Long Does a Debt Management Plan Stay on Your Credit Report?

When you enroll in a debt management plan, it won't appear as a separate account on your credit report. Instead, while you're enrolled, the accounts that are included in the plan will have a note that they're managed by a financial counseling program or enrolled in a debt management plan.

Article Sources
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  1. Internal Revenue Service. "Topic No. 431, Canceled Debt – Is It Taxable or Not?"