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Debt Management

Debt can be a confusing subject, especially when you’re heavily into it, which most Americans are.

In the United States, total consumer credit – debt incurred for purchasing goods or services – is $3.1 trillion. Nearly forty percent of America’s 120 million households carry a balance on credit cards. The average balance for each home that carries credit card debt is $7,200.

A Debt Management Program (DMP) can help families and individuals struggling with that much debt.

A DMP is a carefully constructed financial plan to eliminate unsecured debt without taking on a loan. It often requires clients to stop using credit cards and make monthly payments to the credit counseling agency, which uses the money to pay off creditors.

A DMP is not a loan. The counseling agencies communicate with creditors to reduce the interest rate and lower or waive late fees so that monthly payments go down. The agencies work in the client’s favor, saving them time and money in paying off the debt.

For example, someone with $15,000 in credit card debt paying 20 percent interest would pay $456 a month over 48 months to eliminate the debt. That is $22,344, including $6,922 in interest.

On average, InCharge is able to reduce the interest rate by 6 to 9 percent. If the rate goes down to 7 percent, the monthly payment drops to $381 (including the average monthly fee of $22). The total paid is $18,669 and only $2,243 in interest.

The total saved over 48 months is $3,675.

How a Debt Management Plan Works

Education A Vital Element

The National Foundation for Credit Counseling (NFCC), the national organization that certifies credit counseling agencies, demands an educational component from all its members. 

A good counseling agency teaches clients the root causes of debt so they understand why they are in this position to begin with. The education process includes monthly newsletters, financial calculators and help with setting up and maintaining a budget. 

InCharge clients have access to MyInCharge, an online account tool with up-to-date information on debt balances.

Do DMPs Affect Credit Score?

FICO, the best-known of several companies that calculate personal credit scores, says that Debt Management Programs will not affect a person’s credit score. 

Participating in a DMP may be noted by a creditor, but that does not negatively impact the score. 

InCharge considers itself a partner in a Debt Management Program and communicates with clients often to prevent late payments. The typical DMP runs from 36-to 60 months, but if the client stays engaged, he leaves credit card debt free.

Not To Be Confused With Settlement or Consolidation

A Debt Management Program is often confused with Debt Settlement and Debt Consolidation, though they are three distinctly different ways of dealing with debt. 

In very basic terms, Debt Management Programs seek a reduction in interest rates and monthly payments with no impact on credit scores. 

Debt Settlement seeks to negotiate a payment that is less than the balance owed and has a considerable negative impact on a credit score. 

Debt Consolidation seeks one monthly loan payment that will pay off the debt. Impact on the credit score varies.

Debt Settlement

Debt Settlement is making a deal with creditors to pay less than the total balance owed. As attractive as that sounds, there are some severe penalties, notably to your credit score and tax liabilities. 

Debt Settlement usually involves attorneys. There are fees involved, typically a percentage of the settlement amount, which can be significant. 

Typically, the attorney asks the client to stop making payments to the creditor and instead, contribute money on a regular basis to a fund. When the fund reaches a certain level, the attorney will approach creditors and seek an agreement to settle for that amount. 

The client will be expected to provide the creditors with documentation of their financial status, meaning income, assets and all debts. Creditors want verifiable proof that the person can’t pay before they agree to a Debt Settlement. They are very suspicious of someone just trying to save money by paying less than they owe. 

If the creditor accepts the agreement, the debt is considered settled. However that is not the end of the story. 

The client must report the amount forgiven on their taxes as income. For example, if the creditor forgives $5,000 of a $10,000 debt, that $5,000 must be reported to the IRS as income and the client must pay taxes on it. 

Finally, there is the matter of how it affects a credit score. In the above example -- $5,000 forgiven on a $10,000 balance – the credit score companies see that as a negative because only half the debt was actually paid. 

The person ran up $10,000 in debt, but paid only $5,000 of it. There is concern about the risk of not having a debt paid in whole in the future, thus there is a negative impact on the overall credit score.

Debt Consolidation

Debt Consolidation Plans involve packaging all debts together and paying them off by taking out a loan at reduced interest rates. The lower rate is often secured by using other assets, such as a home or automobile. 

For example, a person with three or four credit cards, might owe a combined $20,000 on the cards and be paying something like 24 percent interest. The credit counseling agency representing him could go to a bank and negotiate a loan at half that rate and save quite a bit of money in interest. 

The loan money would be used to pay off the credit cards, creating a zero balance on each card. Instead of making three or four payments every month, the person would have only one payment.   

There are some similarities between Debt Consolidation Plans and Debt Management Programs, but one glaring difference: Debt Consolidation Plans don’t require a client to give up their credit cards. That leaves the temptation to run up more debt, which only extends the problem.


Each of these options – Debt Management Program, Debt Settlement and Debt Consolidation – can be done by an individual. A credit counseling agency does not have to be involved. A person wishing to go it alone, should start with a detailed budget, listing all income, expenses and debts. The person would have to contact each creditor and conduct negotiations with each one, whether it’s for reduced fees, waiving late fee penalties or reducing monthly payments.

Dealing with debt can be stressful. Negotiating with creditors, especially ones that have been hounding you with demanding phone calls and letters, will add to that stress. 

Non-profit credit counseling companies like InCharge, which is certified by the NFCC, can act as a buffer. 

The choice is yours.  

Quick Facts about Debt Management Plans

Goal is to access reduced interest charges, late fees and monthly payments. Make monthly payments to credit counseling agency, which then pays creditors. Educating the client on root cause of debt is important part of the process. No impact on credit score.

Quick Facts about Debt Settlement Plans

Goal is to negotiate a significant reduction on the balance owed. Service fees can be substantial. Amount that debt is reduced is treated as taxable income and must be reported to IRS. Considerable negative impact on credit score.

Quick Facts about Debt Consolidation Plans

Goal is get a loan at a reduced interest rate and consolidate bills into a single monthly payment.Generally speaking, the debt is paid over a longer period of time. Loans often require collateral such as a home or car. Little impact on credit score, as long as no payments are missed.


  • NA, ND Debt Management Plan. Retrieved from 
  • Tim. (2014, April) American Household Credit Card Debt Statistics: 2014. Retrieved from
  • NA, (2012, March 23) How does credit counseling affect my FICO score?
  • White, J. (2013, September 10) Settling accounts will hurt credit scores. Retrieved from 
  • NA, ND Debt Repayment Calculator. Retrieved from

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