What is a debt management plan?

If you're struggling with out-of-control debt, a debt management plan (DMP) may be able to get your interest rates lowered and late fees waived.

DMPs are usually offered by credit counseling services as part of a portfolio of financial asistance options. While these agencies are nonprofits, a DMP usualy comes with startup and monthly fees that can add up to thousands of dollars, depending on how long it takes you to complete your program.

Find out how debt management plans work, how much they can cost and whether they're the right option for you.

A debt management plan is a service offered by many credit counseling agencies. Unlike a debt settlement plan, which involves negotiating to lower your balances, the agency works wth with creditors to create a structured payment plan, usually with lowered interest rates, waived fees or smaller monthly payments. Counseling services report being able to lower APRs, on average, to between 6% and 10%.

You'll still owe your full principal balance, but you could save thousands of dollars in interest and pay off your debts much faster than just by making minimum payemnts on your credit card.

Typically, only unsecured debts like credit card and medical bills are typically eligible for DMPs. Secured debts, like mortgages or car loans are not eligible.

Operating in all 50 states, Apprisen and Money Management International are two of our top picks for debt management plans.

Enrolling in a DMP can take anywhere from a few days to several weeks, depending on how many creditors you have.

1. Book a free initial consultation. A certified counselor will evaluate your financial situation. They may recommend a variety of options, including a debt management plan. The counselor should be able to share all the details of the new new repayment plan, including fees and requirements.

2. Review plan and enroll. Review the terms of the plan befor signing up, including fees, repayment terms and restrictions. You'll typically have to close any credit accounts enrolled in the plan and may have to agree not to open any new ones while enrolled.

3. Make payments to the credit counseling service. You'll receive a single monthly statement and send payment to the agency, which will pay your creditors on your behalf. If you fall behind on payments, a creditor may cancel the plan and reinstate late fees and interest. On average, clients take three to five years to complete a DMP .

In addition to their monthly debt payments, clients usually pay a one-time enrollment fee, usually between $25 and $75, and monthly service fees, which an range from $25 to $50.

If you enroll in a debt management plan with a $50 startup fee and $40 monthly service fee, and take four years to complete it, you'll pay $1,970 in fees.

• Startup fee: $50
• Monthly service fee: $40 x 48 months = $1,920
• Total fees: $50 + $1,920 = $1,970

Both debt management plans and debt settlement plans can help you climb out of mounting unsecured debt. But there are major differences in how they work, how you're charged and the impact to your credit score.

While a debt management plan can save you thousands of dollars in interest, there are drawbacks to consider.

Pros

• Lowers interest rates: You may be able to get your APR lowered significantly.
• Gets fees waived: Creditors may be willing to stop late fees and other penalties
• One monthly payment: You send one payment to the service, which distributes funds to your creditors.
• Limits collection calls: Creditors typicalluy stop collection efforts once you start making payments.
• Clear payoff timeline: Debt managmenet plans typically finish within three to five years.

Cons

• Can only enroll unsecured debts: Mortgages, auto loans and other secured debts aren't eligible
• Doesn't reduce your principal: Unlike debt settlement, you must still pay your original balance in full
• You'll have to close accounts: You'll likely have to close most or all of your credit cards when you enroll and can't apply for new loans or credit cards while on the plan.
• Credit score impact: Closing multiple credit accounts can cause your credit utilization to spike, which can lower your credit score.
• Fees: While the agencies are nonprofits, they charge startup and monthly fees that can add up to thousands of dollars.
• Requires strict commitment: Missing payments can cause your creditors to nullify the plan and reinstate old charges.

A debt management plan may be right for you if you're still able to make at least the minimum balance requirement on your credit cards but need help paying off your balance.

You'll have the support of a certified professional who will interact with your creditors on your behalf and create a financial roadmap for you to follow. Plus, you'll likely have an easier time paying down the debt after your interest is lowered and fees are waived — and you'll have a single payment for all your enrolled accounts.

If you find yourself falling behind month after month, a debt management plan is probably not the right option. If you don't keep to the program, your creditors can reinstate your APR and fees.

Before you decide to sign up for a debt management plan, consider other options.

1. Pay down the debt yourself

If you're able to set aside extra money to put toward your bills, two popular debt payoff strategies are the avalanche method and the snowball method.

With the avalanche method, you continue to make the minimum payment on your accounts and put anything extra toward the debt with the highest interest rate. Once you clear that card, you can move on to the next debt with the highest interest, and so on. The idea is to pay as little as possible in interest.

The goal of the snowball method, on the other hand, is to keep you motivated. You'll continue making minimum payments, and focus extra money on the account with the lowest balance. For some people, being able to see a "win" early on is motivation they need to keep going.

2. Balance transfer credit cards

A balance transfer card lets you move a high-interest credit card balance to a new card with a lower APR. Some cards come with a 0% APR welcome offer, so you can tackle the principal without accruing additional interest. Zero-interest periods can range from 12 all the way up to 21 months, depending on the issuer and your credit history.

You'll pay transfer fee on each balance you move, usually 3% to 5%. You'll also need to pay off the new balance before the welcome bonus expires or you'll get hit with the card's standard interest rate — putting you right back where you started.

The Wells Fargo Reflect® Card and the Citi® Diamond Preferred® Card both have generous intro APR periods and don't charge annual fees.

3. Debt consolidation loans

A debt consolidation loan streamlines multiple debts into one monthly payment with a lower, fixed interest rate. Many lenders will even pay your lenders directly. You may have to pay an origination fee, which can range between 1% and 10% and is deducting from the amount you are gien.

LightStream can provide same-day funding and charges no origination fee or late fees. If you have shaky credit, Avant approves debt consolidation loans for borrowers with 550 FICO Score.

4. Debt relief companies

If you feel like you're in a neverending debt cycle or can't make your minimum payments, a debt relief company may be able to get your creditors to agree to accept less than the full amount owed. They typically don't work with secured debts, like mortgages or auto loans, and fees for debt relief can range from 15% to 25%, depending on state regulations and the amount enrolled.

It can cause serious damage to your credit score, but debt relief companies report being able to reduce balances by as much as 50%.

Freedom Debt Relief and Accredited Debt Relief both have decades of experience negotiating with creditors and have positive reviews on Trustpilot and the Better Business Bureau.

5. Bankruptcy

Bankruptcy can help people who can't keep up with their debts get a fresh financial start. Chapter 7 bankruptcy generally involves selling assets to pay creditors, with any remaining eligible debts discharged, or written off. Chapter 13 bankruptcy creates a court-approved structured repayment plan, typically lasting three to five years. Filing for bankruptcy generally triggers an automatic stay, which stops most collection efforts, including calls, wage garnishments and lawsuits. Not all debts can be discharged, however, and bankruptcy can have a significant impact on your credit.

If you are considering bankruptcy, consult a credit counseling service or bankruptcy attorney to understand what your options and obligations are.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every credit guide is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of credit products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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