Pros and Cons of Debt Management Plans

Learn about the upsides and downsides to debt management plans and get information about how to steer clear of related scams.

While debt management plans might help some people solve their financial difficulties, these types of plans can sometimes lead to more money troubles. Many debt management agencies charge high fees for services that consumers can handle themselves, make promises they don’t keep, and fail to pay creditors in a timely manner if at all. Because a plethora scammer companies offer debt management plans, every consumer should be extremely wary before signing up for this type of plan.

What’s a Debt Management Plan?

Companies that offer debt management plans work with you and your creditors to come up a plan to repay your unsecured debts, like credit cards, small medical debts, and collection debts. In many cases, companies offering debt management plans call themselves “credit counseling agencies.”

Here’s how a typical debt management plan might work: The debtor deposits money into an account every month and the credit counseling agency uses the money to make payments to creditors under the plan. Usually, the debtor has to make regularly scheduled payments into the account for three to five years and—under the terms of most plans—must pay the debt management company a fee in addition to the monthly deposits.

Upsides to Debt Management Plans

Probably the biggest upside to a debt management plan is that creditors often agree to waive certain fees and reduce interest rates as part of the plan. Most creditors will make some concessions when you’re on a legitimate debt management program. Eliminating the interest can significantly reduce the amount you owe each month.

Here are a few more advantages of using a good debt management program:

  • You’ll receive credit counseling, financial counseling, budgeting advice, and information about many options for getting out of debt. (Learn about different options for dealing with your debt.)
  • A counselor works with your creditors so you don’t have to.
  • For some people, it’s simpler to make one consolidated payment each month to a debt management company instead of making payments to multiple creditors.
  • If you avoid bankruptcy by successfully completing a debt management program, any negative items in your credit report will be deleted after seven years, instead of after ten years for a bankruptcy.

Downsides to Debt Management Plans

Unfortunately, it's far too easy to fall into a debt management scam, sign up for services you really don't need, or end up paying lots of money to a disreputable agency that could otherwise be used to pay your creditors.

Falling prey to a debt management scammer. Some debt management companies are legitimate nonprofit credit counseling agencies, but many aren’t. Common debt management scams and abuses by scammer credit counseling agencies include:

  • failing to pay creditors on time under the terms of the plan
  • not paying creditors at all and keeping the deposits consumers make
  • making promises—like lower interest rates and reduced fees from creditors—that the company can't or won't keep
  • charging high fees to consumers
  • exaggerating the amount of money consumers will save with a debt management plan
  • lying about the company's nonprofit status and using this status to attract customers, then funneling unreasonably high fees to a for-profit company, and
  • promising to provide financial advice and education to consumers, then just automatically enrolling customers in a debt management without providing any kind of counseling.

Debt management plans can be costly. Even if you're considering a debt management plan that’s offered by a legitimate credit counseling company, you should still use extreme caution before signing up for the service. Generally, debt management companies get paid either from the creditors, who may voluntarily rebate a small percentage of the funds being paid by the consumer under the plan or by charging the consumer fees—often called "contributions" or "donations"—which can be high. (Though, a legitimate credit counseling agency might waive its fees if your income is very low.)

Any time you pay an agency to help you with your debt issues, you’re spending money that could be used to pay off your debts. Keep in mind that debt management companies often charge substantial fees for services that you might be able to do on you own, like contacting your creditors and working out individual payment plans. You might even be able to persuade your creditors to reduce fees, interest rates, and the principal amount that's due. You can then use the money you would have paid to the agency to pay down your debts faster or to build up an emergency fund. (Learn strategies for negotiating with creditors.)

Before signing up for a debt management plan, you should explore all of your other debt relief options and figure out if the amount you have to pay to participate in the plan makes sense.

Protecting Yourself From Debt Management Scams

If after you look into other forms of debt relief and consider the downsides of a debt management plan, you’re still thinking about signing up for one, make sure you’re dealing with a legitimate nonprofit credit counseling agency.

Here are some tips for finding a reputable agency:

  • Make sure the company is accredited, usually by the Council on Accreditation (COA) or the International Organization for Standardization (ISO).
  • Consider using a Consumer Credit Counseling Service (CCCS) agency, which is a member of the National Foundation for Credit Counseling (NFCC), and is accredited by the COA.
  • The counselors working for the agency should be certified by an independent agency, which means they’ve passed a certification exam that tests for understanding in areas such as counseling, budgeting, credit and consumer law, debt management, and bankruptcy.
  • Check for complaints filed against the company with your state attorney general’s office, the Better Business Bureau, and local consumer protection agencies.

If you do decide to proceed with a debt management plan, be sure to get everything in writing, including fees, and follow-up with your creditors to make sure they’re getting paid on time.

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