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A debt management plan (DMP) is a structured repayment program that can help you pay off unsecured debts, like credit card balances, through one monthly payment. Offered by nonprofit credit counseling agencies, these plans may also lower your interest rates or waive certain fees.
Debt is a growing concern for older Americans who are in or heading for retirement. The numbers are staggering: Among households headed by adults age 65 to 74, average debt more than quadrupled over three decades to $134,950 in 2022 ($94,620 for those 75+), according to the most current data from the Federal Reserve.1
If you find yourself buried under a mountain of credit card bills, you have options—and a debt management plan may one that's worth exploring. Here’s how these plans work, the pros and cons, and how to decide if it’s the right path for you.
Debt Management Plans at a Glance
| What is a debt management plan? | It's a structured program that combines eligible unsecured debts into one monthly payment. |
|---|---|
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What debts can be included? | Credit cards, store cards, unsecured personal loans, medical bills, and some collection accounts may be eligible. |
| Can it lower interest rates? | Often, yes, but each creditor must agree. Some creditors may also waive certain fees. |
| Does it reduce how much you owe? | Usually not. You repay the principal in full but may save on interest and fees. |
| Will you have to close your credit cards? | Credit cards included in the play are generally closed. Other cards may also need to be closed. |
| Will it affect your credit? | It may affect your credit indirectly, especially when accounts are closed. On-time payments and declining balances may help over time. |
How does a debt management plan work?
Debt management plans are typically offered through credit counseling agencies. Credit counseling involves unbiased, one-on-one guidance from a certified counselor who specializes in credit card debt. Among other things, a credit counselor works directly with consumers to determine what type of debt relief solution best fits their needs.
Debt management plan requirements are usually strict. You can’t miss more than one or two payments, or you might be eliminated from the program.
If you decide to go ahead with a debt management plan, your credit counselor will contact your creditors to negotiate a payment amount that you can comfortably afford each month. Under the new payment plan, you'll make one monthly payment to the plan's administrator who then distributes the money to your creditors. This arrangement typically lasts from three to five years until all the debt has been paid off. The goal is to make it easier to completely pay off your outstanding credit card debt.
What debts can be included in a debt management plan?
A debt management plan typically covers unsecured debts, including:
- Credit card and store-card balances
- Unsecured personal loans
- Medical bills
- Debt collection accounts
- Some payday loans
Secured debts (e.g., mortgages and auto loans) usually cannot be included. Most plans also exclude federal student loans, tax debt, and court-ordered payments like child support.
What are the pros and cons of a debt management plan?
Pros of a debt management plan
A debt management plan can be a powerful tool for helping you get caught up and back on track with your finances. This option can offer:
- Financial relief: Having to make just one monthly payment can take significant pressure off your budget. It may free up additional funds to spend on life necessities or put aside for savings. A debt management plan can also help protect your retirement income by making credit card and other debt easier to repay.
- Stress reduction: A debt management plan is a straightforward, fixed plan that eliminates the need to juggle different payments and due dates. Plus, knowing you’re on a solid path to debt repayment can greatly reduce your financial stress and anxiety. This is especially important when you’re planning for retirement.
- Fewer collection calls: Once your creditors agree to participate in your DMP, calls from debt collection agencies should greatly decrease or stop altogether. If debt collectors do continue to call, you can direct them to the credit counseling agency you're working with.
- Reduced interest rates and fees: Your credit counseling agency may be able to arrange for reduced or waived finance charges and fees. This can help you save money and pay off your debt faster.
- Shrinking account balances: If you're working with a nonprofit credit counselor, 100% of your payments will be applied toward your debt. The sight of those balances getting smaller can be very motivating.
Consof a debt management plan
It’s important to understand potential drawbacks of a debt management plan before diving in head-first. While the benefits are many, there are some downsides to choosing this debt relief approach:
- A DMP is designed for unsecured debts only, like credit cards or personal loans. If you're struggling with other types of debt such as auto loans, a debt management plan probably isn't right for you.
- You won't be able to use credit while your plan is active. In most cases, enrolling in a debt management program will require you to close one or more credit accounts. You won't be permitted to use credit cards or open new lines of credit.
- Your creditors may not be on board. Enrolling in a debt management plan depends on getting your creditors to agree to the terms. If some are not willing to participate, meeting your debt obligations won't be as straightforward.
How does debt relief affect your credit score?
When you enroll in a debt management program and your credit accounts are closed, your credit score may drop somewhat. But the news is not all bad. If you stay current with your plan payments and progressively shrink your balances, your credit score should rebound over time.
Is a debt management plan worth it?
Debt management plans aren't for everyone. You might be a suitable candidate for a DMP if:
- You have credit card or other types of unsecured debt (e.g., medical debt).
- You hold more than one credit card with a balance.
- Your credit card debt carries high interest rates, fees, or minimum payments.
- You're struggling to pay your bills every month.
- You're just not making any progress paying down your account balances.
A smart first step in getting out of debt is finding a reputable nonprofit credit counseling agency to work with.
How do I find a credit counseling agency?
You can search for certified credit counselors online using the National Foundation for Credit Counseling (NFCC) and Financial Counseling Association of America (FCAA) websites.
NCOA recommends GreenPath Financial Wellness, a nonprofit agency rated A+ by the Better Business Bureau (BBB).
Since debt relief is big business, and there are a lot of scams out there that target older adults, it’s important to do your research. When interviewing agencies, ask the company about the completion rate for their debt management programs as well as what fees they charge. While an initial credit counseling session is often free, many agencies charge a setup fee plus a monthly fee. These can range from $30 to $100 dollars per month.
Frequently asked questions (FAQ)
Do debt management plans lower interest rates?
They can. The credit counseling agency you work with may be able to negotiate with your creditors to reduce interest rates (sometimes significantly) and waive certain fees. But keep in mind that creditors are not required to agree, and your results may vary.
How do you qualify for a debt management plan?
A credit counselor will take a look at your income, living expenses, and unsecured debts to determine whether you can afford the plan’s monthly payment. You generally don’t need a certain credit score to qualify, but you must have eligible debts and earn enough income to repay them.
Can you get a loan while on a debt management plan?
It may be possible, but qualifying for a loan while on a debt management plan can be harder. Lenders will consider your credit, income, existing debt, and payment history. Your plan may also require you to get approval from your credit counseling agency before taking on new debt.
Can medical bills be included in a debt management plan?
Yes, they often can. Many credit counseling agencies and medical providers allow unpaid medical bills to be included, but some do not. Be sure to ask the agency if it works with your specific health care provider or collection agency.
Don’t hesitate to ask for debt management help
Credit card debt is common among older adults, and help is available for those who need it. Although it may take a few years, a debt management plan could be your ticket to a debt-free life, a better financial future, and a financially secure retirement.
Want more financial management tips? Visit our Money for Older Adults resource hub.
Source
1. Board of Governors of the Federal Reserve System. Survey of Consumer Finances, 1989-2022. Found on the internet at https://www.federalreserve.gov/econres/scf/dataviz/scf/chart/
