Debt management plan

What It Means

A debt management plan (DMP) is a repayment schedule a credit counselingCredit counselingAdvice from a trained counselor, usually at a nonprofit agency, on your budget and debts, which can lead to a debt management plan or other next steps. See more organization works out with you and your creditors. You make one payment a month to the organization, and it pays each creditor on your behalf. Creditors may agree to lower interest ratesInterest rateThe yearly percentage a lender charges for borrowing money, not counting fees; the APR adds certain fees to show a fuller cost. See more or waive some fees, but the Consumer Financial Protection Bureau (CFPB) notes a plan doesn't always reduce the amount you owe: the balances get paid in full, usually over several years.

How People Say It

• "We're on a debt management plan through a credit counselor."
• "One payment goes to the agency and they pay all the cards."
• "They got the rates down on three of our four cards."

The Breakdown

Worked example. $12,000 spread over several credit cards at an average APR of 24%, paid at $360 a month, next to a plan where creditors agree to an example 8% APR and the agency charges an example $25 a month:

These are Buhata's example numbers, rounded, using the APR divided by 12 each month.

What the result means. The balance is the same in both columns; every dollar of the $12,000 still gets repaid. Any saving comes from the lower rate, which lets more of each payment reach the principal, so the plan finishes sooner even after its fee. The FTC says a plan can take 48 months or more, and it only works if every payment is made on time.

How it compares. A plan repays what you owe in full. Debt settlementDebt settlementPaying a creditor a lump sum that's less than the full balance, often through a for-profit company, in exchange for the creditor treating the debt as resolved. See more, usually sold by for-profit companies, tries to pay creditors less than you owe. BankruptcyBankruptcyA federal court process for people and businesses that can't pay their debts, ending in a discharge of many debts after an asset sale or a repayment plan. See more goes through a court.

Good to Know

Credit counseling organizations are usually nonprofit, but the CFPB notes they're allowed to charge fees, so get the costs in writing before you agree to a plan. The FTC says a plan covers unsecured debtsUnsecured debtMoney you owe that isn't backed by collateral, such as credit card balances, medical bills and most student loans. See more such as credit cards, student loansStudent loanMoney borrowed to pay for college or career school, repaid with interest after you leave school; it comes from the federal government or a private lender. See more and medical billsMedical debtMoney owed for health care, such as hospital, doctor, lab or ambulance bills; unpaid bills can go to collections and, in some cases, onto credit reports. See more, and that creditors may agree to lower rates or waive fees. On your credit reportCredit reportA record of how you've borrowed and repaid, kept by credit bureaus and sold to lenders, landlords, insurers and others who decide whether to deal with you. See more, Experian says some creditors add a note that you're repaying through a plan; the note isn't used in credit scores, though a lender reading your report can see it. The FTC's guide to choosing a credit counselor warns against an organization that pushes a plan as your only option before it has spent real time on your finances.

Related Terms and Categories

• Credit counseling

  Advice from a trained counselor, usually at a nonprofit agency, on your budget and debts, which can lead to a debt management plan or other next steps.

• Debt settlement

  Paying a creditor a lump sum that's less than the full balance, often through a for-profit company, in exchange for the creditor treating the debt as resolved.

• Debt consolidation

  Rolling several debts into one new loan or card balance, usually to get a single payment and, ideally, a lower interest rate.

• Bankruptcy

  A federal court process for people and businesses that can't pay their debts, ending in a discharge of many debts after an asset sale or a repayment plan.

Debt and credit