How Debt Management Programs Work

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A few weeks ago, I discussed How Debt Settlement Works, and today I wanted to talk about another debt related topic – debt management programs or debt management plans.

A debt management program is similar to debt settlement in that you pay a third party who will, after taking their fee, pay your creditors. You are still responsible for your debts but the third party will help you stay disciplined in keeping your obligations. However, that’s where the similarities between the two differ.

A debt management programs or plans may be able to help you negotiate for lower interest rates on your debts, get your late fees waived or reduced, work out a payment schedule, and potentially consolidate your various monthly payments into one payment. Like debt settlement, these programs are not cheap and some places will charge you a lot in fees. The goal with a debt management program

Disclaimer: Much like the disclaimer in the debt settlement post, I have to issue the same warning here. I’m not in the debt management business, I’m a personal finance blogger. I know debt management is fraught with scams, frauds, and other unsavory characters and so I’m writing this for educational purposes only. I’m not advocating anyone use debt management and I cannot guarantee the accuracy of anything in this article because I’ve never been through the process.

Please consult a lawyer and an accountant before making any decisions based on the information you read here.

How Debt Management Programs/Plans Work

Usually you contact a credit counseling organization and, after a thorough financial review, they may recommend that you begin a debt management program to help you repay your debts. I recommending reading this Federal Trade Commission article on credit counselors before you make any decisions.

The DMP is a fairly simple program. You deposit money each month with the credit counseling organization and they use those funds to repay your unsecured debt. They will contact your creditors on your behalf and try to get your interest rates lowered and some fees waived. You will have to double check that the counseling organization is actually doing this, otherwise you’re paying them for nothing. Call your creditors and confirm that they have accepted the plan as outlined by the counseling organization. The key in all this is that there is a plan in place, based on your financial situation, and that you know you’ll be free of those debts after the program is complete.

The FTC has a must-do list for people on DMPs, if you are considering it then I would read that article and make sure you can do everything on that list before you sign up. It doesn’t help you to sign up for any debt solution if you can’t meet the solution’s requirements!

You Can Do It Yourself

There is nothing about debt management that you can’t do yourself, if you have the discipline. Unlike debt settlement, where you negotiate with creditors and convince them to take a lower settlement, debt management requires very little negotiation. One of the most important things you should take away from this article is that you can do this yourself.

In addition to being able to do it yourself, it requires a lot of discipline whether you work with credit counselors or not. You still need to make payments. If that’s a problem today and a little interest rate help isn’t enough, it makes no sense to pay counselors to setup a plan or enroll you in a program that won’t help. In the end, you still need to make payments and these programs are not panaceas.

Do It Yourself Debt Management

Have I convinced you that it’s something you might be able to do yourself? If so, here’s the DIY version:

  • Set up a budget: Budgeting may seem like a pain and you may not know how to budget, but it’s an integral part of any plan to pay off your debt. With a budget, you’ll be able to cut unnecessary expenses and find extra money to put towards your debts.
  • Call creditors: This is the only “scary” part of the process because you’ll need to ask your creditors for some help. Ask them if they can waive your late fees, reduce your interest rates, or work with you to setup a payment schedule that you can meet. Be honest and tell them that you’re in debt and trying to get out, you just need a little help. They don’t want you to go bankrupt, miss payments, or otherwise default, so they should work with you.

Sounds easy right? The plan is straightforward, it’s the execution that’s tricky.

There are a ton of people who have repaid their debts without the help of debt settlement or debt management programs, but if you’ve used a DMP (even if it’s a homegrown one), please share your experiences.

{ 9 comments, please add your thoughts now! }

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9 Responses to “How Debt Management Programs Work”

  1. Thomas Fox says:

    There is much more that a Debt Management company offers than indicated here. The choices many have made in relation to their earnings are predicated on a misunderstanding of finances; therefore, attempting to do such a process on one’s own can be arduous. First, it is the lack of financial literacy which has gotten the USA in most of its troubles today. Currently, there are only 9 states that offer personal finance curriculum as a prerequisite for high school graduation.

    As mentioned, many American lack the basic knowledge to make informed financial decisions. Of the hundreds of personal finance seminars I conduct each year, I believe it is fair to say that 90% of those I educate do not know how a credit score is calculated. Reputable, non-profit, debt management organizations employ nationally certified counselors who work to restructure an individual’s finances while educating them on aspects of finance to empower them. Of the people that contact a Debt Management company, a small percentage (15% in the case of the agency I am employed by) needs a structured Debt Management Plan (DMP). The 85% of the public we speak with simply do not know how to overcome indebtedness and make sound financial decisions.

    Our counselors provide free education, as well as additional resources (educational guides and DVD’s) and complete periodic follow-ups to ensure that the advice helped those who contacted us. For those that need a DMP, the reductions that agencies receive are typically greater than a consumer can receive on their own. That aside, it is the financial literacy training provided that truly makes the difference. Those who use our DMP receive biannual budget reviews, quarterly educational material and the comfort of knowing there is someone on their side.

    As for fees, we adhere to the sliding scale models required by states and all charges are based on an individual’s ability to pay — there are 7% of those we help absolutely free. Comparing the fees from a non-profit agency to that of a Debt Settlement company is like comparing apples to horse drawn carriages. Typically, debt settlement programs will charge several thousand dollars for their services. Furthermore, their programs have an abysmal completion rate – roughly 2%. Debt management programs do charge, but the savings a client receives more than compensates for the minimal charges of the service. Also, the education provided is invaluable (an aspect many in the debt settlement industry are very much apposed to providing.)

    Finally Debt Management companies provide important community initiatives. Our agency conducts a variety of financial workshops to a host of agencies. Currently, we are running programs in correctional centers, VA medical facilities, transitional housing shelters, high schools, colleges and other agencies who realize those they service need to understand the importance of establishing a personal economy.

  2. My Journey says:


    I have a neighbor who seems to work for a legit DMP (never heard the acronym before but I like it), and when we were discussing his job I made the same points you did and his response was:

    1) You/The Debtor hasn’t done it in the past, what makes you think they are going to now take control vs. letting someone else take the reigns.

    2) He/his company has prior relationships with the creditor. For example, he has a certain account rep at visa, MC, amex to call. It is his good will he is trading to almost vouch for the client.

    I think the second point is much more valid than the first.

  3. Xerol69 says:

    I just wanted to throw in my 2 cents here. I am currently on the last month of a DMP.

    First, a little bit about my situation. My situation wasn’t as bad as many, but I didn’t like where I was, and wanted to change things. I owed quite a bit on credit cards from mistakes I made when I was younger. I paid my bills on time, so there were no late fees or anything, but the interest rates where killing me (I made a couple late payments when I was younger as well). I contacted each of my credit card companies and asked them to reduce my interest rate. I was calm, cool, and collected and explained the situation just as you pointed out above. It didn’t work. Every one of them told me no.
    Granted the economy has changed quite a bit since I started my plan 2 1/2 years ago, so you might have better luck negotiating yourself now.

    Next I turned to a DMP, I could afford my payments, so I did not want to declare bankruptcy, but if the interest rates didn’t change something was going to happen. I researched a few and ended up going based on a recommendation from a trusted family member. I don’t know the rules of this blog, so please forgive me if this is not allowed, but I used a company called Clearpoint Financial. Their service fee was $30 per month. So yes that added up over the coarse of my program, but compared to the savings they negotiated for me I found it well worth it.

    They were able to negotiate as much as 20% reductions on some of my credit cards. Once I was on the program, I no longer had any double digit percentages on my credit cards… trust me this really helped! Before I started, almost all of the cards I put in the program had double digits.

    So here I am now on my last payment and I am totally credit card debt free. I have lived the last 2 1/2 years of my life off of cash only and can’t see myself going back to the way I was before. It just makes so much more sense this way.

    To sum it up, my experience has been great. If you find yourself in a situation similar to mine, I would definitely recommend a DMP.

    Thanks for taking the time to read this, sorry for being so winded :).

  4. Jim–In my many years of reviewing credit reports, one thing that was abundantly clear is that most people don’t complete debt settlement programs for the very same reasons they can’t manage their payments.

    From where I sat the ratio was close to 10 to 1, uncompleted vs. completed. To complicate the matter, the ones who couldn’t complete the plans saw their credit go from bad to awful, for reasons I won’t go into here.

    Also, I have to agree with My Journey, that the average person probably isn’t capable of working out a debt settlement on their own. When you do you’re dealing with creditors who know their business and laws attached to it. Plus it takes a very strong stomach to carry it through.

  5. Not to sound like a broken record, but I agree with both the prior statements. The issue is not the implementation of a plan, it’s the overspending, self-indulgent habit that put the debtor in debt that is the real issue. Until someone owns up to the problem and puts into practice sound principles that help address the underlying habit, then a plan becomes another failed attempt. I’d almost recommend going to counseling before signing up for a DMP. As you pointed out Jim, anyone can create a plan and call creditors. But a counselor can help someone address the habitual nature of getting into debt.

  6. azphx1972 says:

    Interesting timing. Liz Pulliam Weston just published an article on the same topic:

  7. Xerol 69–Conratulations on being one of the relatively few who make it successfully through a debt management plan. I suspect that the reason you have is because you took full responsibility for your situation, realized going in that it would require REAL sacrifice, and committed to following it through to completion.

    I’ve always suspected that most people don’t make it because they’re only looking for an easy way out, for any port in a storm to put off the day of reckoning.

  8. Damon Day says:

    In much agreement with what has already been said, whether you opt to settle your debt, enroll into a DMP, or take advantage of any other potential option, the one thing that all of the options have in common is the debtor. If the debtor is not willing to change their habits, there is no program that will work.

    The fundamental thing that must change is the debtors attitude and habits. Some of these programs may accelerate the rate at which a debtor can achieve debt freedom, but the car won’t even get out of the driveway if the debtor is unable or unwilling to make fundamental changes to their finances.

    None of these programs are a magic panacea, that by simply enrolling into them, your money problems will go way.

    Make sure you are willing and able to do what is necessary to achieve success before wasting what little money you do have on some program that you are not ready to see through to completion.

  9. Clara says:

    Please don’t blame consumers before you know all the facts. To understand the credit card industry here in the USA watch the movie, Maxed-Out. Consumers that borrow from these companies do so at their own peril, often unaware of the intent these companies have to destroy their customers long term financial lives. If you borrow from these sources and some unplanned thing befuddles your payments, expect to have the full weight of congress on the side of the credit card company or bank. In the regulated past, companies often wisely curtailed credit and worked with consumers that found themselves in unexpected hot water. Today, a family in trouble no matter if they’ve just lost their spouse, child, or parent to death, whether by prolonged illness, accident, foreign service, or homicide, will be confronted with staunch refusal on the part of these companies to negotiate with the creditor. We will never know how many consumers decided to commit suicide after attempting to talk with them, but there are clear cases wherein companies and collectors have pushed the consumer to that end rather than work directly with them to resolve problems.

    Beyond contacting the credit company, the average consumer has no idea what to do when trouble arises. The idea of contacting an attorney is foreign to most and appears too expensive to consider. Today’s debt management programs are considered by many state attorney’s general to be fraught with fraud and abuse leaving the consumer with nowhere to turn. And the resulting confusion, frustration, and fear is compounded by the power of at least 2 when the loss of a family member has occurred and the unregulated company continues to pursue every avenue of collection except the one that would allow repayment on impossible terms.

    Congresswoman Elizabeth Warren was just elected to congress in her state largely because of her record of holding to account unscrupulous banks and credit card companies, but it is going to take a considerable time to put back hi-jacked regulations so that the financial horrors visited upon unknowing Americans can safely resolve.

    Meanwhile, for anyone who comes to this site seeking help, let the comments show by at least one, that they are not crazy or stupid or alone in their struggle to find a reasonable way to deal with their (now) greatly imperiled situation.

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