How Long Does a Debt Management Plan Last?

Credit card debt can be an absolute budget killer. Studies show that people who carry a balance from month-to-month tend to stay stuck in never-ending debt cycles, without making any real progress toward payoff.

In the meantime, debtors pay astronomical interest rates of 15% to 22% on average.

How do you break that ugly cycle? One of the best ways to get out of debt is by committing to a Debt Management Plan (DMP).

Yes, these plans take time to complete — typically 2-5 years — but unlike when you deal with debt on your own, DMPs give you a pre-set timeline for paying off credit cards and some other debt types. Plus, they can lower your interest rates to around 8%, which should lower your monthly payment.

Debt Management Plans (DMP)

A Debt Management Plan (DMP) is a payment arrangement that helps you pay off credit cards, plus certain personal loans and medical debt. DMPs are primarily offered by nonprofit credit counseling agencies. That’s the safest way to go, but some for-profit companies offer them, too.

Here’s what makes nonprofit DMPs unique in comparison to alternatives like debt settlement or consolidation loans:

• Get one-on-one budget support from a certified credit counselor.
• Eligibility is not based on your credit scores.
• Consolidate multiple debt payments into one monthly payment.
• Potentially lower your monthly payments and interest rates.
• Have a set timeline for debt payoff.
• Stop collection calls and prevent lawsuits from creditors.
• Make long-term improvements to your credit scores.
• Low-income customers potentially qualify for fee waivers.

How Long Do Debt Management Plans Last?

Debt Management Plans typically take 2-5 years to complete.

So no, they’re not an overnight solution, but they are one of the few safe, reliable methods for eliminating debt. On top of that, DMPs can drastically shorten your debt payoff timeline when compared to other options.

DMP Versus Paying off Debt on Your Own

When you pay off credit card debt on your own, there’s no guaranteed payoff date. If the interest rate increases or you add new charges to the card, your payments can go on indefinitely.

For example, let’s say you have $10,000 in credit card debt and your interest rates are 21% (the current national average). Assuming you never make another purchase with your card, how long will it take you to pay off?

It depends. Here are a few potential scenarios:

Credit Card Payoff Timeline Without a Debt Management Plan

As you can see, there’s a chance the debt will never be paid off!

By contrast, if you pay off $10k by using a five-year DMP at 8% interest, you’ll be debt-free in 60 months and your interest charges drop down to $2,150. For a three-year payoff plan, the total interest drops to $1,278.

DMP versus Debt Settlement

Hiring a debt settlement or “debt relief” company might seem like a quicker solution than a DMP … but not so fast!

Some debt settlement companies claim they can get creditors to settle your debt in as little as two years. But the truth is, they can’t guarantee that a single dollar of your debt will be forgiven. Creditors are under no obligation to agree to debt settlement.

In many cases, you have to send them monthly payments for as long as four years. In the meantime, you rack up late fees from your creditors, face potential lawsuits for overdue debt, and ultimately, there’s a chance none of your creditors will agree to settle!

Setting Up a Debt Management Plan

To find out if you can enroll for a Debt Management Plan, contact an NFCC-certified credit counseling agency.

Your counselor should start with a free session where they ask questions about your financial situation and help you explore options. If you feel they’re pressuring you to enroll in a DMP, try calling a different agency.

If the counselor determines you’re a candidate for a DMP, here’s what you can expect:

1. Schedule an appointment for further review of your income and debt and to calculate what you can afford to pay.
2. The counselor will contact your creditors to create your payment plan.
3. You’ll have to sign an agreement and may need to make an initial deposit
4. After you enroll in a DMP, you send one monthly payment (including any fees) to the counseling agency.
5. The counseling agency will disburse your payment to your creditors until your enrolled debt is paid off.

Calculating Length of Debt Management Plan

When you work with your credit counselor, the counselor will calculate the length of your Debt Management Plan. The length of time you spend on your DMP will depend on the following factors:

• Total debt: How much debt you include in the plan, including any fees owed to your creditors.
• Monthly payments: How much you can afford to pay each month.
• Additional expenses: Interest charges from creditors and fees charged by the counseling agency.

Reducing the Length of Your Debt Management Plan

Sticking to a payment plan for several years can be tough, and some people give up before they reach the finish line. To speed up the process, the best thing you can do is pay more than the minimum amount due.

If that’s not possible right away, consider paying more whenever you can. For example, if you get a tax refund or your income increases, send a bigger payment.

With that said, saving money for emergencies should come first. If you end up in an emergency situation, like losing hours at work or an unexpected medical emergency, you don’t want your circumstances to interfere with your DMP. So, to be safe, it’s always good to try and put some money into your emergency savings before sending extra to your counseling agency.

Once you have some money saved, then it’s a good idea to start paying extra each month you can afford it. A successful budget can help you manage both savings and debt payments effectively.

How Do Debt Management Plans Affect Credit Scores?

When you go on a Debt Management Plan, you’ll likely see an initial drop in your credit scores, followed by a significant gain in points.

The initial loss of points happens because most creditors require you to close the accounts you include in your DMP. However, one long-term study found that people who completed DMPs saw their credit scores improve by more than 80 points.

It’s also worth noting that you can avoid major credit damage by sticking with a DMP. Enrolling in a DMP can help you avoid these debt-related activities that seriously hurt your credit scores, including:

• Racking up higher debt balances
• Falling behind on credit card and loan payments
• Having debt sent to collections
• Filing bankruptcy

In fact, one study found that amongst people who sought credit counseling, those who enrolled in a DMP were 44% less likely to file for bankruptcy.

Alternatives to a Debt Management Plan

A DMP isn’t the only way to manage overwhelming debt. There are other options, some safer than others, that you might have already considered. Here’s how they compare:

• Personal loan: If your credit is good enough to qualify, you can potentially take out a new loan with lower interest rates to pay off your debt. Just check the lender’s fees before applying for a consolidation loan, and make sure the payments are affordable.
• Balance-transfer credit card: For people with good or excellent credit, you can potentially qualify for a credit card that has an initial 0% APR offer on balance transfers. You can transfer your old credit card debt to the new account to get a period of 0% interest, but you usually have to pay a 3%-5% balance transfer fee. Plus, regular (high) interest rates will eventually kick in if the debt is not paid before the introductory period expires.
• Debt settlement: Work directly with your creditors to negotiate a settlement offer and pay less than what you owe. With this option, you can save money, but your credit won’t improve and you may owe taxes on the forgiven debt. Alternatively, you can work with InCharge to set up a Credit Card Debt Forgiveness Plan where settlement amounts are worked out, up front, on your behalf.

As always, you can get professional help with choosing the best debt management option by talking to a nonprofit credit counselor before you decide which direction to go.