Debt management plans

What is a DMP?

A debt management plan is an arrangement set up by a credit counseling agency, usually a nonprofit. You make one monthly payment to the agency and it distributes the money to your creditors under terms it has arranged, often at reduced interest rates. You repay the full principal. Nothing is forgiven.

• One monthly payment instead of several card minimums.
• Reduced interest rates arranged with participating creditors.
• Full balances repaid, typically over three to five years.

How credit counseling and DMPs work

Is a DMP the same as settlement?

No, and the difference is the most important thing to understand on this page. A DMP repays everything you owe at a lower rate. Settlement tries to resolve accounts for less than the full balance and generally involves falling behind first.

• DMP: full repayment, lower interest, accounts stay current.
• Settlement: less than full balance, serious credit damage, possible lawsuits and taxes.

Counseling compared with debt relief

Will my cards be closed?

Usually yes, for the accounts you place on the plan. Creditors generally require the account to be closed as a condition of the reduced rate. Most agencies let you keep one card off the plan for emergencies or identity verification, but that is a creditor-by-creditor matter, so ask before enrolling.

What enrolling in a DMP involves

Does a DMP hurt my credit?

Less than settlement or bankruptcy, and the effects are mixed. Payments made through a plan are generally reported as on time, which helps. The main negative comes from closed accounts, which can raise your utilization and shorten your average account age.

• On-time payments through the plan support your history.
• Closed cards reduce available credit, which can lower your score at first.
• Some lenders may see a plan notation while you are enrolled.

Rebuilding credit during and after a plan

How much can DMP interest rates drop?

Reductions are common and can be substantial, often taking high card rates down to single digits or low double digits, but every rate is set by the individual creditor, not the agency. No agency can promise a specific rate before contacting your creditors. Ask for a written proposal showing the expected rate on each account before you enroll.

Estimate a plan payment and rate

What does a DMP cost?

Nonprofit agencies typically charge a modest one-time setup fee and a monthly fee, and many cap or waive fees based on hardship. Federal rules also require clear disclosure of fees before you enroll.

• Ask for the setup fee and monthly fee in writing.
• Compare the total fees against the interest the plan would save.
• Be cautious about any agency asking for a large fee up front.

Typical counseling costs and what to ask

How long does a DMP take?

Most plans are built to finish in three to five years, because that is the window creditors generally accept for the reduced rates. If your budget cannot support a payment that clears the balances in that time, the agency will usually tell you, and that answer is useful. It means the plan is not the right tool for your numbers.

Estimate your plan length

Which creditors participate?

Most major credit card issuers work with counseling agencies, and many store cards do as well. Participation is voluntary, so it varies by creditor and by account. Debts that generally do not fit a DMP include mortgages, auto loans, federal student loans, and tax debt.

How major creditors handle hardship

Can closed cards go on a DMP?

Often yes, if the creditor still owns the account and it has not been sold to a collection agency. Once an account is charged off and sold to a debt buyer, a DMP usually cannot help, because the plan works through reduced interest on active accounts. Accounts in collections generally need a different approach.

What to do with accounts already in collections

Can I leave a DMP early?

Yes. A DMP is voluntary and you can stop at any time, but there are consequences worth knowing before you do.

• The reduced rates generally end and the original terms return.
• You go back to paying each creditor separately.
• Paying the plan off early is different and usually welcome.

What to consider before leaving a program