Pros and Cons of Debt Management Plans

If you are overwhelmed by your debts, you’re not alone. The average American has more than $92,000 in debt, including credit cards, student loans, and personal loans.  If you’re struggling to pay off your balances, one option is to work with a nonprofit credit counseling agency and enroll in a debt management plan. With this approach, you can pay off your debts in five years or less and get other help managing your money. However, debt management plans are not for everyone, and there are some downsides to consider. Here’s what you need to know. 

What Is a Debt Management Plan? 

When you enroll in a debt management plan, you’ll work with a nonprofit credit counseling agency. Your counselor will contact your creditors to gain their participation and may be able to get them to reduce your interest rates, lower your monthly payments, or waive their late fees. A counselor can also help you create a budget, reduce your expenses, and better manage your money. 

Under a debt management plan, you’ll make just one monthly payment to the credit counseling agency rather than paying your creditors directly. The counseling agency will disburse the money to your creditors on your behalf, based on a payment schedule they agree on together.

Debt management plans require consistent monthly payments. They usually take three to five years to complete, and you must agree not to use or take on any additional credit during that time. At the end of your debt management plan, your accounts will be completely paid off, and you’ll be debt-free.

The Pros and Cons of Debt Management Plans

Pros

• Become debt-free within five years: Under a debt management plan, you typically pay off all of your existing accounts within five years. 
• Simplify your payments: Instead of having multiple payments and due dates to remember, you’ll make just one payment to the credit counseling agency. Having only one payment can make it easier to manage your money. 
• Improve your credit score: As you start making payments under the debt management plan, you may gradually improve your credit score.

Cons

• Lose access to credit cards: To ensure you don’t rack up additional debt, credit counseling agencies will require you to stop using or even close your existing credit cards. Going forward, you’ll rely solely on cash and debit cards until your debt is paid off. 
• Cannot open new lines of credit: While enrolled in a debt management plan, you cannot open any new lines of credit, so you can’t use an auto loan to buy a car or a personal loan to renovate your home.
• Creditors may not participate: Not all creditors will agree to participate in a debt management plan. If creditors refuse to be included, then the plan will be less effective. 

3 Credit Counseling Agencies to Consider

There are many credit counseling agencies in operation. While there are typically enrollment and maintenance fees, some agencies will waive those fees in certain circumstances. 

Below are three nonprofit credit counseling agencies that offer debt management plans in all 50 states: