What is Debt Management?

By Ana Gonzalez-Ribeiro, MBA, AFC®
Published on: 08/20/2019

When you have a lot of debt, it can be challenging to make any real progress toward paying it down. Juggling multiple due dates and minimum payments is time-consuming and frustrating. Forget one payment, and you’re hit with a late fee and perhaps even a penalty rate, sending you deeper into the debt hole.

If that scenario sounds familiar, you may want to consider a debt management plan. Read on to learn more about debt management plans, how they can help you get a handle on your debt and how they might impact your credit.

What is debt management?

Under a debt management plan, instead of making separate payments to each of your creditors, you make one single monthly payment to the credit counseling agency, and the agency disburses funds to all unsecured creditors – such as credit card companies, private student loans, personal loans and medical bills – on your behalf.

Debt management plans typically do not include secured debts such as:

  • A mortgage
  • Auto loan
  • Home equity loan
  • Federal student loans

A nonprofit credit counseling agency typically administers a debt management plan. A credit counselor reviews your financial situation and all the debts you have. If the counselor believes a debt management plan is the best option for your case, they will ask you to commit to the program.

How to find a debt management plan

There are many credit counseling agencies in the U.S. – and for good reason.

According to fourth quarter 2018 data from Experian, debt levels reached record totals in America in 2018, with overall consumer debt reaching $13.3 trillion. That number includes several categories, including:

  • $834 billion in credit card debt
  • $9.4 trillion in mortgage debt
  • $291 billion in personal loan debt
  • $1.37 trillion in student loan debt
  • $1.27 trillion in auto loan balances

Of course, not all individuals with debt struggle to make their monthly payments, but for those who do, there’s no shortage of companies ready to take advantage of desperate consumers and leave them worse off financially than they already were.

Most reputable credit counselors are nonprofit organizations, but the FTC warns, “that nonprofit status doesn’t guarantee that services are free, affordable or even legitimate.”

The FTC recommends looking for a program offered by:

  • A local university or branch of the U.S. Cooperative Extension Service
  • A military base
  • Your credit union or financial institution
  • The housing authority
  • A local consumer protection agency

Do some searching online or ask friends, family members or even your family attorney or accountant for a referral. You can also search for a counselor in your state via the U.S. Department of Justice’s list of approved credit counseling agencies. Make a list of counseling agencies you’re considering and check out each one with your state Attorney General to see if the agency has consumer complaints filed against them.

Even after doing some initial research, once you meet with a counselor, you should be aware of signs that the service is actually a credit repair scam rather than legitimate credit counseling.

According to the CFPB, warning signs include:

  • Asking you to pay before providing services
  • Guaranteeing a specific increase in your credit score
  • Promises they can get rid of negative information on your credit report, even though the information is accurate

How does a debt management plan work?

Unlike a debt consolidation loan, a debt management plan doesn’t pay off your old debts and replace them with a new loan. You remain indebted to your original creditors, but the credit counseling agency handles payments for you.

A debt management plan also doesn’t typically reduce the amount you owe, and your creditors will continue to charge interest on your balances while you are on the plan. However, the credit counselor may negotiate with creditors on your behalf to lower your interest rate and waive other fees. This increases the amount of your monthly payment that goes toward paying down your principal balance, helping you get out of debt faster.

If you’re having trouble making the minimum payments on your debt, the counselor may negotiate with your creditors to have you make payments over a longer period, which reduces your monthly payment.

A successful debt management plan can take two years or more to complete, so don’t expect a fast fix. Ask the credit counselor how long they expect it will take you to complete the plan. Be aware, in most cases, you will have to agree not to apply for new credit or use your existing credit cards while you are participating in the plan.

How does a debt management program affect your credit?

Enrolling in a debt management program alone won’t improve your credit score, but it can affect other aspects of your credit that factor into most credit scoring models.

Settled debt on credit report

Negotiating a lower interest rate or waived fees with your credit card company won’t impact your credit score, but if your credit counselor negotiates with your creditor to accept less than the full amount you owe, the account will show as “settled” on your credit report. (Learn how to read a credit report.)

This is considered a negative item and will remain on your credit report, lowering your credit score, for up to seven years from the date of the settlement.

Missed payments

If you enroll in a debt management plan, but then are unable to make your agreed-upon monthly payments on time, the credit counseling agencies cannot make payments for you and those missed or late payments will appear on your credit report.

Payment history accounts for up to 35% of your credit score. Because your debt management plan may cover many debts, one missed payment will result in several late payments being reported to the credit rating agencies and harming your credit score.

Even if you make your payments on time to the credit counseling agency, review your monthly statements to ensure your creditors are getting paid according to the plan.

Higher credit utilization ratio

A debt management plan may require that you close your existing credit accounts to ensure you don’t accumulate new debts while you’re working through the plan. Doing so increases your credit utilization ratio – the amount of credit you’re currently using divided by the total amount of credit you have available.

Your credit utilization rate can impact up to 30% of your credit score, so closing accounts, lowering the amount of credit you have available and increasing your credit utilization ratio can negatively impact your score.

Despite these potential impacts on your credit score, a debt management plan can help you improve your credit score in the long term. As you make regular monthly payments and reduce your debt balances, your credit score should increase.

Debt management plan vs. debt settlement

Debt management is different from debt settlement. Debt settlement companies typically have you stop paying creditors while they negotiate with the creditors to accept a lower payoff on your account – typically, 50% to 80% of the balance owed.

Although a debt settlement company may be able to settle one or more of your accounts, there is no guarantee that their negotiations with your creditors will be successful. In the meantime, creditors will report late payments to the credit bureaus, add late fees and interest to your accounts and may file lawsuits against you.

Even if the negotiations are successful, having the accounts shown as settled on your credit report will lower your credit score and the amount of debt forgiven will be reported to the IRS as income.

Overall, debt settlement is a risky endeavor, so debt management is a better option whenever possible.

How much does a debt management plan cost?

Debt management plans – even those run by nonprofit credit counseling agencies – typically charge an upfront setup fee of up to $75 and a monthly administrative fee of up to $75. Those fees may be higher or lower depending on the organization and state law.

While that may seem high – especially if you’re already struggling to make ends meet – in the long run, a debt management plan can help you save thousands of dollars in interest and fees. Plus, your credit counselor will help educate you on money management, developing a budget, building good credit and even buying a home or avoiding foreclosure. Their guidance can help you improve your current financial state and create a new, debt-free lifestyle.

Other options for debt relief

If debt management isn’t the right option for you, there are other ways to deal with debt:

Negotiate directly with your credit card company

You don’t have to pay someone else to talk to your credit card company for you. It might be worth your time to try calling your creditors yourself. Explain your situation and see if they are willing to lower your interest rate or remove late fees, which will help you pay off the balance in a shorter time frame.

If your financial troubles are due to job loss or serious illness, ask if they can put you on a hardship plan that lowers your minimum monthly payment.

Debt consolidation loan

If you have several high-interest credit cards, you may be able to consolidate those debts into one monthly payment by transferring those balances to another card or a debt consolidation loan with a low interest rate.

However, keep in mind, debt consolidation doesn’t prevent you from applying for new debts or running up credit card balances again. Unless you change your spending habits, you may find yourself in an even worse situation within a short period.


Bankruptcy might be one of the most feared words in personal finance, but if you have little or no income and are drowning in debt, it may be your only real option.

Chapter 7 bankruptcy liquidates assets to pay off creditors. Chapter 13 gives you a chance to reorganize your finances without selling off your assets.

Both methods can wipe out unsecured debts and give you a fresh start. If either of these sounds like the right option for you, talk to an experienced bankruptcy attorney who is familiar with the laws in your state. (Learn more about rebuilding your credit after bankruptcy.)

Is debt management the right option for you?

A debt management plan is a good option when your debts seem overwhelming, and you’re looking for a way to get a handle on your monthly payments and credit balances.

Talking to a reputable credit counseling agency is an excellent first step towards deciding whether debt management is right for you. They can review your situation and make recommendations based on your unique circumstances.

Either way, get all the facts and do your research before you sign up for any program. Debt management plans can be a lifesaver for some people, but working with a shady company can end up doing more harm than good.

About the author

Janet Berry-Johnson is a Certified Public Accountant and personal finance writer. Her work has appeared in numerous publications, including CreditKarma and Forbes.

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Written on August 20, 2019
Self is a venture-backed startup that helps people build credit and savings.

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