What Is a Debt Management Plan?
A debt management plan is a carefully constructed payment schedule, set up and managed by a nonprofit credit counseling agency, like InCharge Debt Solutions.
The purpose of the plan is to pay off credit card debt by reducing interest rates and creating an affordable monthly budget that includes a line item devoted to paying off debt. There is no loan involved and credit scores are not a factor in joining the program.
Making a commitment to financial discipline is key. When you’re enrolled in a debt management program, creditors require you to close your credit cards so as not to incur additional debt.
Video: How Does a Debt Management Program Work?
This video explains how a nonprofit debt management program works by consolidating your credit card balances into one payment and saving you money by reducing your interest rates and fees. It defines a clear and realistic goal – to pay off your debt in a 3-5 year time span.
Pros and Cons of a Debt Management Program
Debt management programs are one of the most effective debt-relief options available. They work because monthly payments are tied to a custom-designed budget tailored to your income and spending. You are consolidating and paying off debt, without having to take out a loan.
As with all debt relief solutions, consumers should do research to make sure they understand the benefits of a debt management plan, as well as possible drawbacks.
Pros of a Debt Management Program
Affordable payments: Credit counselors at InCharge review your income and expenses to determine how much money is available to apply to credit card debt.
Reduced interest on credit card debt: Counselors work with your creditors to lower interest to approximately 8%. That is a significant drop from 20%-30% that card owners in trouble usually pay. The reduced interest rate means a lower monthly payment.
Simple payment: You make a fixed monthly payment to InCharge, which distributes it to your creditors in agreed upon amounts.
Fixed payments and timetable for eliminating debt: Your monthly payment is a fixed amount and debt is eliminated in 3-5 years or less.
Online account management: You can go online to review payments, update balances and track progress 24/7.
Improved credit score: Your credit score may take an initial hit as credit cards are closed, but after 6-8 months of on-time payments (the biggest factor in credit scoring), your score should improve.
Financial education: Credit counselors are available throughout the repayment period to offer articles, workbooks, and other financial literacy so you can better manage debt.
The phone stops ringing: Collection agency harassment ends.
Cons of a Debt Management Program
- Only applies to unsecured debt: You can’t include mortgage, auto loans, or student loans.
- Missed payment penalty: Your debt management plan may be canceled if you miss a payment.
- Cards go away: You must stop using credit cards.
- Not all companies accept proposed reduced interest rates: Some smaller banks, stores and gas station card providers may not accept debt management programs.
- It takes time: It takes 3-5 years to complete (which keeps payments affordable, improving chances of success).
How to Enroll in a Debt Management Program
Enrolling in a debt management program requires a credit counseling session to determine that it is the best solution for your debt problems.
The process begins with a phone call to InCharge Debt Solutions, or you can start with an online credit counseling session. The counseling session should take 25-40 minutes.
What to expect in a credit counseling session:
- Certified credit counselors help identify the root cause of your debt.
- Counselors help create an affordable monthly household budget by examining income and offering recommendations to lower your expenses.
- We pull a snapshot of your credit report to make sure your balances and monthly payment requirements are accurately recorded. This is a soft pull and will not harm your credit score.
- We provide a debt-relief recommendation, based on income and debt.
- If a debt management program is your best option, you can sign up immediately.
- Card companies usually require you to close credit card accounts, but some will agree to allow you to keep one card open for use in emergencies.
How Do Debt Management Plans Work?
A debt management plan simplifies your credit card bill-paying: You make one fixed monthly payment to InCharge Debt Solutions, and InCharge takes care of making monthly payments to your creditors. The counseling helps you understand your budget, as well as how the plan will save you money and improve your credit score. It requires going on a credit diet and reducing nonessential spending, but it is worth it when your debt is eliminated, your money isn’t going to credit card payments and your credit score is solid.
What Debts Can I Include in a Debt Management Plan?
Debt management plans eliminate unsecured debt. The difference between unsecured and secured debt is that secured is tied to collateral (property that can be taken back if you fail to pay).
The most common unsecured debts included in a DMP:
- Credit card debt
- Personal loans
- Medical bills
Debts that can’t be included:
- Mortgages
- Auto loans
- Student loans
- Tax bills
What Do Credit Counselors Do?
Certified credit counselors are trained in budgeting, credit, debt management and more. They review your income and expenses, explain debt-relief options, and offer financial education resources. They’re required to act in your best interest. They won’t “sell” you on a debt management solution. They help you determine which debt-relief option works best for you.
How Will a Debt Management Plan Affect My Credit Score?
InCharge does not report participation in debt management to credit bureaus, but your creditors might. Your credit score may decrease when you close your credit cards at the start of the program, but it will increase gradually with consistent on-time payments. Every credit situation is different, so learn more about how credit scores are calculated for a fuller picture.
What to Expect While Living on a Debt Management Plan
Life on a debt management plan takes commitment. As you stick to a budget and learn to live within your means, you’ll see your credit score and financial situation improve.
Tips on how to succeed on a debt management plan:
- Make on-time payments
- Don’t acquire new credit
- Monitor statements and report any discrepancies to your counseling agency
Is a Debt Management Plan for You?
Debt and debt management plans are not one-size-fits-all. Not all consumers are in debt for the same reason, and that’s why there are multiple solutions for people trying to climb out.
The ideal candidate for a debt management plan is someone with high-interest credit card or other unsecured debt and a steady enough income to handle fixed monthly payments.
If you struggle to keep lower credit card balances and make payments but are meeting the financial obligations on your secured debt, such as your mortgage and car loan, you may benefit from a debt management plan.
Debt management plans may not be your best option if:
- Credit card debt is only part of a larger burden and you’re also having trouble paying secured debts.
- You are income-strapped and can’t afford your rent, need help with your electric bill, require food assistance, or need help paying for other necessities.
- You want to continue to use your credit cards.
The Top Debt Management Companies
InCharge Debt Solutions is a great place to go for debt relief. Since 1997 it has helped more than a million people repay $3.4 billion in debt and has a 97% customer satisfaction rating and an A+ rating from the Better Business Bureau. The average credit card interest rate in InCharge’s debt management program is 8.4%.
Other top NFCC-rated nonprofit debt management companies:
- Money Management International
- GreenPath Financial Wellness
- Consolidated Credit Counseling
- Cambridge Credit Counseling
Other Debt Relief Options
If a debt management plan isn’t the best solution for your credit card problem, there are other debt relief options.
Solutions could be:
Debt Consolidation Loan – With a very good credit score – 670 or higher – you can get a loan to pay off your credit card debt at a lower interest rate and monthly payment. Use a debt consolidation calculator to see how much you could save with a lower interest rate and fixed monthly payment.
Debt Settlement – Creditors must agree to accept a lump-sum payment that is less than what is owed on your credit card debt. They are not obligated to do so. This is a risky alternative. It usually takes 2-3 years to save enough money to make a lump-sum offer. Your credit score will plummet, making it hard to get loans in the future. There are also high fees, and you must pay taxes on the forgiven amount if it’s more than $600.
Credit Card Debt Forgiveness – This is similar to debt settlement in that you pay less than what you owe, but with some major differences. The major difference is that creditors agree up front to accept 50%-60% of what is owed, and it must be paid over 36 months. Credit card debt forgiveness is only offered by a few nonprofit credit counseling agencies (including InCharge Debt Solutions), which have agreements with a select group of card companies.
Bankruptcy – If your debt overwhelms your income, it may be time to consider a fresh start through bankruptcy. A successful bankruptcy filing will eliminate credit card debt, but also leaves a 7–10-year negative mark on your credit report. Your credit score will drop 100-200 points.
Do-It-Yourself Debt Management – Using InCharge’s guide and help with organizing your payments, you can set up a debt management program on your own.
Hardship Programs – Not all credit card lenders offer hardship programs, but it certainly is in your best interest to ask. Job loss, a pay cut, a debilitating illness, divorce, family emergency or natural disaster may qualify you for hardship consideration, depending on the lender. Terms vary, but a credit card hardship program typically is a payment plan negotiated with your card’s issuing bank. The bank may agree to waive fees and/or lower interest rates for a specified period of time.
Life After a Debt Management Program
Imagine what life would be like without the constant worry of debt, especially credit card debt. That’s what life after a debt management program can be like.
Aside from eliminating your unsecured debt, a debt management program trains you to live within your means rather than relying on credit. The lower monthly credit card payments over its 3-5 years mean you’ve been able to stay on track with your mortgage or rent and other necessities, as well as keep up with other bills, and even save for emergencies and retirement.
If you are budgeting well enough, you can even pay off the plan early.
In addition, InCharge Debt Solutions and other credit counseling agencies offer helpful information and financial literacy programs during the course of your debt management plan – applying it to your life will give you powerful knowledge and help you develop new habits that will last long after the monthly payments to the credit counseling agency are complete.
To maintain a strong debt-free financial position once you finish a debt management plan:
- Use credit cautiously: Don’t end up back where you were before by getting a bunch of new credit cards and maxing them out. You’ve lived within your means for 3-5 years, so it’s something you know how to do.
- Save money: Take the amount you were paying monthly to the credit counseling agency and put it in a retirement, savings, or money market account.
- Work toward goals: What’s the next step? Buying a house? Paying for your kid’s college education? Retirement? Put some or all of the money you were using to pay off credit card debt toward a specific goal.
- Pay down your mortgage: With a better credit score, you may now be in a position to refinance your 30-year-mortgage into a 15-year-mortgage (higher monthly payments but paid off faster and a lower long-term cost). Or you may want to add some or all of what you were paying to the credit agency to pay down your mortgage’s principal faster.
Getting Started with a Debt Management Plan
If you think that a debt management plan is the solution to your credit card debt, get started by contacting InCharge Debt Solutions.
You can call or apply online. The session with the credit counselor is free and takes from 25 to 40 minutes. The counselor will help you determine if a debt management plan, or some other debt-relief solution, is right for you.
Debt Management Program Frequently Asked Questions
We strongly discourage you from opening new credit cards on a debt management program. Instead, we recommend creating room in your budget by reducing expenses and looking for ways to earn additional income.
Yes, you can get a mortgage on a debt management program, as long as your credit score is healthy and your debt payments do not consume too high of a percent of your income.
Make sure you are working with an NFCC-member nonprofit credit counseling agency like InCharge Debt Solutions. Nonprofit credit counselors provide impartial financial advice tailored to your best interests. A nonprofit debt management program will have low fees and work to secure interest rate reductions on your credit card debt, so you can pay off your debt by making consistent affordable payments.
You should be able to pay off your credit card debt in 3-5 years on a debt management program or plan. Your payment will be based on five years of equal installments, paid monthly, but you can pay it down faster. As part of the program, we will share cost-savings strategies that will free up more of your household income to pay off debt.
On average, the monthly fee is $33, depending on which state you live in and the size of your debt. If you enroll in a debt management plan, there is also a one-time, set-up fee of $75 – though this fee also varies by state.
Your creditors will require you to close your credit card accounts once you have enrolled in a debt management program.
To start the process, call one of our credit counselors at 800-565-8953 or fill out our Get Help Now form. You will receive a free credit counseling session and our counselors will determine if debt management is the best solution for you.
The average length of a DMP is 3-5 years, but is shorter for clients who decide to aggressively deal with their debt. Many clients pay down debt faster by using income tax returns, inheritance money or some other unexpected source of income. There is no penalty for paying the debt off early. You can make additional payments while on the plan and pay off your debt faster.
The No. 1 benefit is a lower monthly payment, and the potential of reduced interest rates. There is the convenience of making only one payment for all your debts. You also receive valuable education materials, including financial tips and reminders for payments due. InCharge clients can track their progress online, see their balances and percent of debt they've paid off.
Many consumers see a significant reduction on interest rates from participating creditors. Typically, interest rates could be reduced to somewhere around 9% and sometimes as low as 2%.
After reviewing your situation and credit profile, our credit counselors may recommend an alternative solution such as credit card forgiveness, debt settlement or bankruptcy.
Bankruptcy is a last-ditch attempt to settle debts. It is a legal proceeding in which you liquidate all non-exempt assets in order to wipe out debt (Chapter 7) or persuade creditors to approve a repayment plan over a 3-to-5 year time frame to eliminate debt. There are severe consequences for both, including a drop of as much as 200 points in your credit score and the bankruptcy action remaining on your credit report for 7-to-10 years. A debt management program is not a legal proceeding. A notation that you are in a DMP could appear on your credit report, but there should be little impact on your credit score until you complete the program. At that time, you could expect your credit score to improve, sometimes dramatically.
When you enroll in a DMP and start making payments, calls from enrolled creditors should cease.
InCharge credit counselors contact the creditors to make them aware you are participating in the program and request lower interest rates and monthly payments. You also receive responses from creditors once proposals are accepted.
InCharge counselors work with you to establish a debt management plan that allows you to make affordable payments every month. If your financial situation changes, call InCharge immediately and our credit counselors will review your situation.
Consumer privacy is at the heart of everything we do. InCharge is committed to protecting your personal information by continuing to upgrade and implement market-leading technologies for system integrity and risk management.
Yes, you can do a debt management program online, but most card companies require you to speak to a credit counselor before enrolling in the program. InCharge Debt Solutions has an online application and credit counseling is over the phone. You will have an online account, with access 24/7 to your balances and payment history. Payment to InCharge is also online, through automatic withdrawal from your bank account.
Sources:
- N.A. (2018, March) Getting Out of Debt. Retrieved from https://consumer.ftc.gov/articles/getting-out-debt
- Nagle, C. (2021, October 24) What to Consider When Selecting the Right Financial Counseling Organization for You. Retrieved from https://www.nfcc.org/resources/blog/selecting-the-right-financial-counseling-organization-for-you/
- N.A. (2022, January 7) Frequently Asked Questions: Credit Counseling. Retrieved from https://www.justice.gov/ust/frequently-asked-questions-faqs-credit-counseling
- N.A. (ND) Debt Management Plans. Retrieved from https://www.nfcc.org/what-we-offer/debt-management-plans/