Pros and Cons of Consolidating Debt with a Debt Management Plan (DMP)

Thinking of consolidating your debt with a debt management plan? Here are a few things to keep in mind as you weigh your options:

Pros

Simplified repayment

Although a debt management plan (DMP) is not a loan, it does combine all your unsecured credit card debts into a single monthly payment. That payment is made to the agency managing your DMP, and is then distributed to each of your participating creditors.

Reduced interest rates

Because the DMP isn’t a loan, there is no single interest rate for the entire program. Individual creditors, however, will often reduce your interest rate if you repay your debts through a DMP.

Budget-friendly payment amount

Debt management plans that are created through a nonprofit credit counseling agency must be viable for the consumer – meaning you have to be able to afford the payments each month. That’s why a budget counselor will work with you beforehand to help you build a monthly spending plan and determine how much you can afford.

Maintain flexibility

Unlike other forms of debt consolidation, you can cancel a debt management plan at any time if you don’t think it’s working out for you. Once canceled, you would just resume making normal monthly payments to your creditors.

Fixed end date

Debt management plans are designed to pay off your debts in full within five years, and most are completed within three.

No credit requirements

You don’t need good credit to qualify for a debt management plan.

Cons

Not every creditor is guaranteed to participate

Debt management plans only really work when your creditors are willing to participate and offer you benefits for using the DMP. Nearly all major credit card providers will offer some benefit for using the plan, but it’s not a guarantee that every one of your creditors will participate.

Your credit cards will likely be closed

In exchange for offering reduced interest rates and other benefits, creditors will almost always close your credit card account once it’s been included on a DMP. This may cause a temporary drop in your credit score.

  • The Consumer Federation of America (CFA) is an association of nonprofit consumer organizations that was established in 1968 to advance the consumer interest through research, advocacy, and education. Today, nearly 300 of these groups participate in the federation and govern it through their representatives on the organization's Board of Directors.
  • The National Council of Higher Education Resources (NCHER) is the nation’s oldest and largest higher education finance trade association. NCHER’s membership includes state, nonprofit, and for-profit higher education service organizations, including lenders, servicers, guaranty agencies, collection agencies, financial literacy providers, and schools, interested and involved in increasing college access and success. It assists its members in shaping policies governing federal and private student loan and state grant programs on behalf of students, parents, borrowers, and families.

  • Since 2007, the Homeownership Preservation Foundation (HPF) has served as a trusted, neutral source of information for more than eight million homeowners. They are partnered with, and endorsed by, numerous major government agencies, including the U.S. Department of Housing and Urban Development and the Department of the Treasury.

  • The mission of the U.S. Department of Housing and Urban Development (HUD) is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD works to strengthen the housing market in order to bolster the economy and protect consumers; meet the need for quality affordable rental homes; utilize housing as a platform for improving quality of life; and build inclusive and sustainable communities free from discrimination.

  • The Council on Accreditation (COA) is an international, independent, nonprofit, human service accrediting organization. Their mission is to partner with human service organizations worldwide to improve service delivery outcomes by developing, applying, and promoting accreditation standards.

  • The National Foundation for Credit Counseling® (NFCC®), founded in 1951, is the nation’s largest and longest-serving nonprofit financial counseling organization. The NFCC’s mission is to promote the national agenda for financially responsible behavior, and build capacity for its members to deliver the highest-quality financial education and counseling services.