If high credit card debt payments are eating up your income and making it impossible to maintain a budget, it may be time to consider a debt management program. In my opinion, it’s one of the best debt relief options out there—especially for people with bad credit.
Now, I may be biased. I started my career running a nonprofit credit counseling service that offers people a way out when they’ve gotten over-extended with credit card debt. That way is by enrolling in a debt management program, and it’s a way that the credit card companies themselves support and endorse. They agree to the program upfront. So, you don’t have that worry that you have with solutions like debt settlement that your creditors won’t accept the deal.
It also doesn’t ruin your credit. There are no negative credit report penalties for enrolling and completing the program. In fact, it helps you build a positive payment history with each payment your make, so people with bad credit often see their scores improve as they complete the program.
So, let me tell you everything you need to know about this solution, so you can decide if it’s right for you.
Table of Contents
What is a debt management program?
A debt management program—also called a debt management plan or DMP—is a structured agreement between debtors and their creditors. It consolidates your debt into one monthly payment and the repayment plan is overseen by a nonprofit consumer credit counseling service. The credit counseling team works with your creditors to reduce or eliminate interest and stop fees. That way, you can focus on paying the debt you owe instead of all those accrued monthly interest charges.
Unlike other debt consolidation solutions, like personal loans, you still owe your original creditors. That’s a good thing because it means you don’t have to qualify for new financing. So, you can have bad credit or too much debt to qualify for a loan and still consolidate your debt successfully.
Now, there are some caveats. You’re going to have to give up your credit cards. Any cards you enroll in the program will be frozen when you enroll, so you can’t make new charges. Once those cards are paid off, they’re closed in good standing.
If the thought of closing your cards scares you, you can rest easier knowing that you aren’t required to include all your cards. Although I encourage you to do so because learning to live without depending on credit will change your life. The credit counseling team will help you create a budget that covers all your expenses and even helps you start an emergency savings fund. That way, you don’t need credit cards to cover unexpected expenses and emergencies.
Of course, you may be wondering how that’s possible. The answer is that enrolling in a debt management program will lower your total monthly credit card payments by up to 50 percent. Then that money that you save can be used to balance your budget and start your savings fund.
The facts about debt management programs
|Average time to pay-off||36-60 payments|
|Amount of principal repaid||100% (paid-in-full)|
|Average negotiated interest rates||0-11%|
|Total credit card payment reduction||30-50%|
|Effect on credit||Generally positive or neutral|
|Works best for||Credit card debt still with the original creditor|
|Other types of debt you can include||Debt collections |
Unsecured personal loans
Credit card debt consolidation loans
How a nonprofit debt management plan works
- You get a free debt and budget evaluation over the phone with a certified credit counselor.
- They review your debts, credit, and budget, and talk with you about your needs and goals.
- Then they explain all the options you may have for debt relief.
- If a debt management plan is your best option, they help you set a realistic budget and find a consolidated monthly credit card payment you can afford.
- Then the credit counseling team contacts your creditors.
- Your creditors agree to accept payments through the program and agree to reduce or eliminate interest and stop any penalties being applied to your balance.
- Once all your creditors agree, your program starts.
- You pay one monthly payment to the credit counseling agency that they distribute every month to your creditors as agreed on your behalf.
- The creditors report this positive payment history to the credit bureaus, and as each card gets paid off it’s closed in good standing.
- You pay off all your creditor cards in 3-5 years, on average, and once you complete the program, you’re free to open new cards if you decide you want new credit.
Comparing payments with a debt management program calculator
There are calculators known as debt management program calculators that can help you see how much the program could reduce your monthly payments. It’s worth noting that these calculators simply make an estimate based on how much you owe. But once you talk to a credit counselor your payment may be different based on the rest of your financial situation.
Still, a debt management program can be helpful because it can help you assess if you’d be able to afford the monthly payment on the program. Debt.com does one better than these calculators with a debt relief comparison calculator. It compares your estimated debt management program savings to two other solutions—a debt consolidation loan and a debt settlement program.
I encourage you to try it out and use it to compare these three popular debt relief options. Again, keep in mind that these are estimates, so you want to talk to a credit counselor for a free evaluation to see what you’d actually pay before you decide.
Debt management program pros and cons
If you just can’t seem to get ahead of your credit card debt on your own but you want to avoid damaging your credit, then a debt management program is likely to be the best solution for you. It’s the only solution that can pay off your balances in full and minimize interest for people who can’t qualify for new financing. While there are some downsides, the benefits far outweigh them, and those downsides are things that most people find they can live with.
Debt management plan pros
- You may one monthly payment instead of juggling bills.
- Your interest rates will be reduced or eliminated entirely, even if you have bad credit.
- If you’re getting popped with late fees or other penalties, those get stopped too.
- Most creditors will bring past-due accounts current after three program payments, regardless of how far behind you are.
- You’ll be able to balance your budget and start saving again.
- If you’re facing collection calls, you can refer the collectors to the credit counseling agency and they’ll deal with them for you.
- You’ll build positive credit history with each debt management program payment you make.
- You get an exact timetable of when you’ll be debt-free.
- You incur no negative credit report items for using a debt management program.
Debt management plan cons
- Any credit cards enrolled in the program will be frozen when your program starts and the accounts will be closed as they get paid off.
- Closed credit card accounts can decrease your credit age, which may cause a drop in your credit score if your score was high when you enrolled in the program.
- You can’t apply for new credit cards while you’re enrolled, although you can apply for secured credit, such as a mortgage or auto loan.
- You can’t include secured debts (mortgages/car loans), student loans, or back taxes in the program, so you’ll need other solutions if you also have those types of debt.
- If you can’t keep up with the payments, you may get dropped from the program. However, any payments made to that point will still be credited to your accounts.
Other debts can be included in a nonprofit debt management program
A DMP (debt management program) is primarily intended to help you pay off credit card debt, and it does an exceptional job at that. Credit cards have high interest rates compared to other types of credit like loans. So, since the program minimizes those rates, it’s incredibly beneficial.
But there are other types of debt you can include in the program if you choose to include them. As long as the creditor agrees to accept payments through your program, you can enroll any of the following debts as well:
It is worth noting that you will lose some of the benefits of a debt management program with collection accounts. By law, most collectors can’t charge you interest or apply penalties that weren’t in your original contract agreement. So, you don’t get the benefits of reduced interest or stopped penalties.
You also pay the account off in full, where you might have been able to settle it for less than you owe. So, you may want to leave collection accounts out. However, including them will stop those collection calls, so you may choose to include them if you simply don’t want to deal with the stress.
Medical debt can be costly. Collection agencies had around 140 billion in unpaid medical bills in 2020, and that might keep increasing. Medical collection bills are the largest source of unsecured debt that Americans owe, outside of student loans.
Medical debt can be included in a debt management program. That includes medical credit cards, loans, and collection accounts. As long as the creditor, collector, or service provider agrees to have the debt included in the program.
If the account is in collections, you’ll lose the benefit of negotiating the interest rates. Medical bills have no interest rates that apply to them.
It’s important to note that you cannot enroll in a debt management plan solely for medical collections. You must have credit card debt, but if you do then you may be able to include the medical collections as well.
If the payday lender agrees to receive payments through the credit counseling agency, then they can be included in a debt management plan. But that’s a big if. Some will, some won’t. It’s generally been my experience that “brick-and-mortar” stores that have a physical location you can walk inside are generally more willing. The online lenders often aren’t. They’ll just continue draining money out of your bank account and it can be hard to stop.
Still, if you have payday loans, make sure to mention them to your credit counselor. At least some of them may be included in your program, which would get you ahead of the game.
This happens more often than you might think. People will get a debt consolidation loan and either the rate is too high or they can’t balance their budget and avoid new debt. Then they run up new balances on their credit cards and wind up with more debt instead of less.
The good news is that if you try a debt consolidation loan and it doesn’t work, you can include it in your debt management program.
The cost of a debt management program
Let’s be honest, there is a cost to using a debt management program. Any debt relief solution—even bankruptcy—has costs to it. The important thing is that since debt management programs are administered by nonprofit credit counseling agencies, the fees are relatively low compared to other solutions.
A debt management program has a one-time setup fee that you pay with your first program payment. Then there is a monthly administration fee every month thereafter.
There is a nationwide cap on debt management program fees. It is currently $79 monthly; however, the average person pays about $49 per month. You only pay once you are enrolled. To make the process easier, all fees are rolled into the program payments. But you will know exactly what those fees are before you enroll.
Consumer credit counseling agencies are 501(c)3 nonprofit organizations. That means they’re not in the business of making money off your financial hardship. Instead, they are primarily funded by grants from credit card companies. As a result, the cost of a debt management program is relatively low compared to other solutions, such as debt settlement.
It still does take some money to run and administer each debt management program. Credit counselors get a salary, and there is overhead and equipment. Fees can be reduced in cases of exceptional financial hardship and waived for certain groups of people.
For example, you may have lower fees if you’re a military Service Member or Veteran. Some credit counseling agencies reduce fees for people living in a declared disaster area for things like hurricanes, fires, or floods. The idea is that people often take on credit card debt following a natural disaster, so they may face severe financial hardship as they recover.Back to top
Want to see if you qualify for a debt management program? Talk to a certified credit counselor now for a free evaluation.
The effects of a non-profit debt management program on your credit
In general, debt management programs tend to have either a neutral or possibly a positive effect on your credit score, but it depends on what your score is when you start. Not using a debt management program might be the worst thing for your credit if you cannot keep up with your minimum monthly payments.
A debt management program can often be good for your credit score because you will make payments on time on all the accounts included in the program. On-time payments improve your credit history, which accounts for 35% of your credit score. Since most creditors agree to bring past-due accounts current after three payments, you can also stop the damage caused missed payments on delinquent accounts much faster.
It’s often the case that you can leave one credit card out of the program to keep it active and open while you pay off your other cards. If you can keep the good habits from the program, keep a low balance and pay on time, this will positively affect your credit score.
At the end of the program, your frozen cards will be closed. This may affect your credit score negatively. Closed accounts can affect your credit age, which measures the average time you’ve had your accounts. It can also affect your credit mix, which measures the amounts and types of accounts you have. However, those factors only account for 15% and 10% of your score respectively.
Hence for most people who enroll in a debt management program, the good credit history usually outweighs the hits caused by closing cards.
It is important to note that while the credit counseling service is working with your creditors to get their signoff on your program, you should continue making payments if you can. Otherwise, you can have missed payments that would affect your history. But once your program starts, those on-time payments to your credit counseling agency will have a positive impact on your credit.Back to top
The differences between debt management and debt settlement
Debt management programs and debt settlement programs are similar in some respects. Both are designed to get you debt-free, and both help you get out of debt with just one lower monthly payment. Beyond those two aspects, the programs are very different.
A nonprofit debt management program will help you pay ALL of what you owe with lower interest rates and a single monthly schedule. You continue to pay your debts while the credit counseling agency works out terms with your creditors. Your entire debt gets paid and not charged off, which means you won’t damage your credit long term.
The program can be used to pay off debts that are current, behind, and in collections. Current debt will stay current and delinquent debts will be brought current, usually within three payments on the program.
Debt settlement is different. You only pay a portion of the balance you owe. A debt settlement company creates an escrow account where you set aside money that will be used to make settlement offers. But your creditors are not paid every month. The debt settlement company only contacts your creditors once there is enough money in your account to make settlement offers. Then the creditor is paid out of that account and the debt settlement company takes their fees.
Debt settlement fees are much higher than those with a debt management program. Companies will either take a percentage of the original debt owed or a percentage of the amount settled, depending on the company’s fee structure. Fees can be up to 20-25% of the amount enrolled in the program or the amount settled. You should receive a detailed summary of how the fee structure works before you sign up.Back to top
Debt management program FAQ
Q:Is a debt management program a loan?
Q:Can you get student loans when you’re in a debt management program?
In addition, these loans don’t need to be used for your education. For example, parents working through a debt management program can apply for loans to fund their children’s education. Parents can get PLUS loans through the Federal Direct lending program and student loans from private lenders.
Q:Can you get a mortgage when you’re in a debt management program?
Q:Can you get a car loan when you’re in a debt management program?
Q:Can you get a new credit card when you’re in a debt management program?
Q:Can I get out of a debt management program?
Q:How much do I need to make to qualify for a debt management program?
Q:Do debt management programs close all accounts?
Q:What happens to my secured credit cards with a DMP?
Q:Do debt management programs work?
If you have medical bills, payday loans, and debt collections, these can also be included. But the program is not as beneficial for these types of debt.
It’s worth noting that only about one out of every twelve borrowers that contact a credit counseling agency end up enrolling in a debt management program. For the others, credit counselors usually recommend alternative solutions, such as consolidation loans or settlements.
Q:Does Capital One participate in debt management programs?
- American Express
- Bank of America
- Capital One
- US Bank
- Wells Fargo
Most major retailers that offer store credit cards also participate in debt management programs. This includes:
- Best Buy
- Home Depot
- JC Penny
- Old Navy
Q:What happens if I am in a debt management program, then declare bankruptcy?
Just keep in mind that if you’re keeping up with your debt management program payments, there’s little reason to declare bankruptcy. You have a repayment plan set up with all your creditors. As long as you stick to the repayment plan, you should be able to get out of debt without damaging your credit. By contrast, bankruptcy will hurt your credit. What’s more, if you file Chapter 13, you’ll still be subject to making monthly payments on the court-ordered repayment plan, which will also last 3-5 years.
So, unless you see the writing on the wall that you won’t be able to keep up with your payments, stick with your DMP. You’ll protect assets from liquidation, keep the courts out of your finances, and start in a strong position credit-wise once you’ve finished paying off your debt.
Q:What if I can’t pay my debt management program?
Even if you are going to be more than 30 days late, they may still be able to help you stay enrolled. They will need to contact your creditors to make sure they’re willing to let you stay in the program. As long as your creditors agree, then you can continue making payments on your DMP.
What you don’t want to do is treat your credit counseling team like debt collectors and start dodging their calls. If they don’t hear from you and you haven’t made a payment, they can’t tell your creditors anything useful. Your creditors will assume you dropped out and the credit counselors won’t be able to tell them anything to the contrary. It’s more likely that you won’t be allowed to continue the program.
Always remember that consumer credit counselors are there to be your ally and your advocate. They’re there to help you make arrangements if you’re struggling to keep up with your payments. But they can only work with you if you’re willing to talk to them.
Don’t waste another sleepless night worrying about your credit card debt. Talk to a certified credit counselor to find the right solution for your situation today.
Article last modified on September 16, 2022. Published by Debt.com, LLC