A debt management plan (DMP) is a financial agreement with a credit counseling agency in which you consolidate multiple credit card debts into a single monthly payment. With this agreement, you’ll make payments directly to the credit counseling agency, which will issue them to creditors. The credit counselor you work with can also support you in creating good financial habits, including developing a workable budget, finding areas to cut back on spending, and helping you create an emergency fund.

Credit card payments can create a problematic cycle of debt –– according to the Federal Reserve nearly half of American households had credit card debt . DMPs are an option you may want to consider if credit card debt becomes too much to handle on your own.

Key considerations

A debt management plan is an option to help you manage credit card debt in partnership with a credit counseling agency.
The credit counselor can help you save money by working with your creditors to negotiate a lower interest rate and fee structure.
Alternatives to a debt management plan include strategic debt repayment, debt consolidation loans, balance transfer credit cards, debt settlement, and bankruptcy.

How debt management plans work

To get started with a debt management plan, you’ll need to get in touch with a credit counselor. A credit counselor is affiliated with a non-profit credit counseling agency, and their job is to offer unbiased guidance to help you pay off your debt.

To locate a credit counselor, you can check with associations like the National Foundation for Credit Counseling (NFCC) and Financial Counseling Association of America (FCAA) or find approved agencies by state using the U.S. Department of Justice’s list of credit counseling agencies.

When you meet with your counselor for the first time, you’ll share the current state of your debt and discuss your broader financial picture. Keep in mind that they can help you pay off unsecured debt, like credit cards and personal loans; however, they can’t help with student loans or loans that use collateral to secure the loan, like a mortgage or auto loan.

Your counselor will support you in developing a payment plan and reach out to your creditors to discuss the DMP and negotiate to see if they can get any concessions. Concessions may include reduced fees and lower interest rates. You’ll then pay your credit counseling agency directly each month, and they’ll be responsible for issuing payments to your creditors.

You’ll likely pay a small fee to the credit counseling agency for the service, but it’s often nominal compared to what you stand to save in interest. In addition to managing debt repayment, the credit counselor can assist you with other aspects of personal finance and act as a resource for financial education.

During the time the DMP is in progress, you won’t be able to use any of the credit cards you’re working to pay down and won’t be allowed to apply for new debt. This can help you focus on forming better spending habits while ensuring you’re not getting deeper into debt.

It’s important to note that a DMP is not a loan. When you sign up for a DMP, you’re essentially restructuring your debt into a single monthly payment. You can cancel the DMP at any time, at which point you’d resume debt management on your own, potentially facing higher interest and fees as your creditors learn that you’re no longer adhering to the plan.

When does a debt management plan make sense?

There are several reasons you may want to explore a debt management plan.

You’ve been unable to pay one or more of your unsecured debts, and they’ve been turned over to collections.
You need the support of a professional to ensure you meet your monthly debt obligations.
You’re making minimum monthly payments, but your debt balance continues to increase.
You’re ready to make big changes to your financial situation and are committed to becoming debt-free.

It’s worth noting that a DMP may not be the right move for everyone facing credit card debt. During the time you’re participating in a DMP, you may need to close existing credit card accounts, and you generally can’t apply for new credit. This can be problematic if you want to take out financing to make a large purchase like a home or wedding. Plus, you’ll need to pay fees to the credit counseling agency to participate, although these tend to be nominal compared to the amount of money you’re poised to save on interest.

Benefits of a debt management plan

There are several benefits of a DMP, including:

You’ll typically be debt-free within five years: It’s only recommended that you go on a DMP if you can realistically pay off your debt within three to five years.
You may improve your credit score: Since a DMP can get you on track with making timely debt payments (thanks to your credit counselor’s guidance), you may find that your credit score begins to improve after a few months.
You’ll receive guidance from a professional: If you struggle with personal financial management, you might flourish under the guidance of someone who can support you in developing good money habits.
You’ll have someone negotiating on your behalf: Your credit counselor negotiates directly with creditors to try to lower interest rates and waive fees. Since they’re experienced in doing so, you may see great results.

Debt management plan alternatives

If you’re interested in a debt management plan but not yet sold on its merits, there are alternatives to explore, including:

Debt repayment strategies

The debt snowball and debt avalanche are two popular methods that can help you organize and prioritize paying off debt. Whether you start with the lowest balance debt (snowball) or highest interest debt (avalanche), the strategy relies on paying the minimum balance on all debts while focusing attention on the prioritized debt. If you have the ability to stick with a plan and financial means to meet the minimum on all debts, this could be a path worth considering.

Debt consolidation loans

A debt consolidation loan helps you combine your credit card debt into a single monthly payment. To qualify for the best rates, you’ll need a good or excellent credit score and proof of income. If your credit score has taken a hit or you’re not bringing in enough to cover current debts, you may not qualify for debt consolidation.

Balance transfer credit cards

If you have a good credit score, you might be able to open a new credit card and perform a balance transfer with 0% interest for an introductory period. Often, this approach makes the most sense when you’ll have the funds to repay your debt within the 12-18 month period of zero interest. Failure to do so puts you back to square one when the interest rate jumps back up.

Debt settlement

Debt settlement, also referred to as debt relief, is when you work with a creditor to settle or close a debt with a payoff amount that’s less than what you owe. Debt settlement typically occurs with collections agencies that have already purchased the debt from the original lender. Before you enter into a debt settlement arrangement, be sure that you understand the implications, especially that it will stay on your credit report for seven years. Debt settlement is typically a last resort option when you’ve been unable to make debt payments and are being regularly harassed by creditors.

Bankruptcy

Bankruptcy is an option to consider if you’ve tried everything else and haven’t been able to resolve debt. When you enter into bankruptcy, you’re undergoing a legal proceeding in which a bankruptcy judge will review your case and determine if you’ll be relieved of your debts. While you may be relieved of unsecured debt, debtors will likely seize collateral for any secured debts. Depending on which type of bankruptcy you file, the interaction could stay on your credit report for up to ten years, and future lenders are unlikely to loan to you.

How BHG Financial can help with debt management

BHG Financial offers personal debt consolidation loans up to $200,000¹ with terms of up to 10 years.^1,2 Our concierge support team is available to review loan options to help you choose the right loan for your unique financial needs. Check your rate online with no application fee, commitment, or impact on personal credit. ³

Consolidating personal credit card debt FAQs

Consolidating personal credit card debt can simplify your finances by combining multiple debts into a single monthly payment with more manageable interest rates. In the long run, this can save you from spending more money than you anticipated or previously agreed to on in-terest payments in the future.

Personal debt consolidation can impact your credit score differently depending on the method chosen. For example, applying for a new loan or credit card for consolidation may result in a temporary dip in your credit score due to inquiries, changes in credit utilization, and your his-tory using credit-based financial products. However, making timely payments on the consoli-dated debt can positively affect your credit score by demonstrating responsible financial man-agement.**

Yes, personal debt consolidation can be applied to various types of debt, including personal loans, medical bills, and student loans, in addition to credit card debt. Consolidating multiple debts into a single payment can streamline your repayment process and make it easier to man-age your finances overall.

With highly specialized financing options for accomplished professionals, BHG Financial offers personal loans up to $200K¹ to use as you need them. With repayment terms that last up to 10 years,^1,2you can fully bring your financial plan to action by consolidating your personal debts into a simple and affordable monthly payment to help you achieve financial peace of mind sooner rather than later.

Our payment estimator can help you see your personalized estimate quickly, and our dedicated concierge service team can serve your needs every step of the way.

¹ Terms subject to credit approval upon completion of an application. Loan sizes, interest rates, and loan terms vary based on the applicant's credit profile. Finance amount may vary depending on the applicant's state of residence.

² Personal Loan Repayment Example: A $59,755 personal loan with a 7-year term and an APR of 17.2% would require 84 monthly payments of $1,228.

³ There is no impact on your credit for applying. For personal loans, a complete credit history, which will appear as an inquiry on your credit report, will be performed upon acceptance and funding of the loan and may impact your credit.

Annual percentage rates (APRs) for BHG Financial personal loans range from 11.96% to 25.31%, with terms from 3 to 10 years.

No application fees, commitment, or impact on personal credit to estimate your payment.

Consumer loans funded by Pinnacle Bank, a Tennessee bank or County Bank. Equal Housing Lender.

For California Residents: BHG Financial loans made or arranged pursuant to California Financing Law license - Number 603G493.

IMPORTANT INFORMATION ABOUT ESTABLISHING A NEW CUSTOMER RELATIONSHIP

To help the government fight the funding of terrorism and money laundering activities, Federal law re-quires all financial institutions to obtain, verify and record information that identifies every customer. What this means for you: When you apply for a loan, we will ask for your name, address, date of birth, social security number and other information that will allow us to identify you. We may also ask to see your driver's license or other identifying documents. If all required documentation is not provided, we may be unable to establish a customer relationship with you.

* “ Which U.S. Households Have Credit Card Debt?” https://www.stlouisfed.org/on-the-economy/2024/may/which-us-households-have-credit-card-debt. Accessed October 14, 2024

What is a Debt Management Plan?