Pros and Cons of Debt Management Plans

Debt management plans are a way to pay off your balances by working with a nonprofit credit counseling agency. With this approach, you can pay off your debts in five years or less and get other help managing your money. However, debt management plans are not for everyone, and there are some downsides to consider. Here’s what you need to know about the advantages and disadvantages.

What Is a Debt Management Plan? 

When you enroll in a debt management plan, you’ll work with a nonprofit credit counseling agency. Your counselor will contact your creditors to gain their participation and may be able to get them to reduce your interest rates, lower your monthly payments, or waive their late fees. A counselor can also help you create a budget, reduce your expenses, and better manage your money. 

Under a debt management plan, you’ll make just one monthly payment to the credit counseling agency rather than paying your creditors directly. The counseling agency will disburse the money to your creditors on your behalf, based on a payment schedule they set.

Debt management plans require consistent monthly payments. They usually take three to five years to complete, and you must agree not to use or take on any additional credit during that time. You will likely have to close the credit cards that are part of the plan. At the end of your debt management plan, your accounts will be completely paid off, and you’ll be debt-free.

The Pros and Cons of Debt Management Plans

Pros

• Become debt-free within five years: Under a debt management plan, you typically pay off all of your existing accounts within five years. 
• Simplify your payments: Instead of having multiple payments and due dates to remember, you’ll make just one payment to the credit counseling agency. Having only one payment can make it easier to manage your money. 
• Improve your credit score: As you start making payments under the debt management plan, you may gradually improve your credit score.

Cons

• Lose access to credit cards: To ensure you don’t rack up additional debt, credit counseling agencies will require you to stop using or even close your existing credit cards.
• No new lines of credit: While enrolled in a debt management plan, you typically cannot open any new lines of credit, such as an auto loan or a personal loan.
• Creditors may not participate: Not all creditors will agree to participate in a debt management plan. Student loans and secured debt is often excluded.

3 Credit Counseling Agencies to Consider

There are many credit counseling agencies in operation. While there are typically enrollment and maintenance fees, some agencies will waive those fees in certain circumstances. 

Below are three nonprofit credit counseling agencies that offer debt management plans: 

Be aware of scam artists that may pose as legitimate credit counselors. When evaluating potential agencies, make sure they are nonprofit organizations.

Check any credit agency that you’re considering using with your state attorney general and/or your state consumer protection agency. The United States Trustee Program also has a list of credit counseling agencies. 

Alternatives to Debt Management Plans

While debt management plans can be effective tools for repaying your debt, they’re not always the best strategy. For example, secured debts and student loans aren’t eligible for debt management plans, and credit counseling agencies may cap how much debt you can have to participate. 

As you consider if a debt management plan is right for you, consider these alternatives: 

1. Debt consolidation: With debt consolidation, you take out a loan and use it to pay off your older existing accounts. With fixed payments and a potentially lower interest rate, a debt consolidation loan can help you save money and accelerate your repayment.
2. Debt settlement: Debt settlement is a risky strategy where you stop making payments and try to negotiate with your creditors for a smaller amount. 
3. Bankruptcy: If your debt is more than you can afford to pay off, then filing for bankruptcy can remove your obligation to repay all of it. However, bankruptcy will remain on your credit reports for seven or 10 years, depending on the type of bankruptcy. The negative impact to your credit report will make it difficult for you to borrow in the future. 

If you aren’t sure which approach is best for your situation, contact a nonprofit credit counseling agency and talk with a counselor about your options. 

The Bottom Line

Debt management plans allow you to pay off your debt in five years or less. To start a debt management plan, you need to work with a nonprofit credit counseling agency.

There may be enrollment and maintenance fees to take part in a debt management plan, and debt management plans are only for unsecured forms of debt, such as most credit cards. However, they can help you simplify your debt repayments, and ultimately allow you to get out of debt more quickly.