What is a debt management plan?

If you’re struggling with out-of-control debt, a debt management plan (DMP) may be able to get your interest rates lowered and late fees waived.

DMPs are usually offered by credit counseling services as part of a portfolio of financial asistance options. While these agencies are nonprofits, a DMP usualy comes with startup and monthly fees that can add up to thousands of dollars, depending on how long it takes you to complete your program.

Find out how debt management plans work, how much they can cost and whether they’re the right option for you.

Typically, only unsecured debts like credit card and medical bills are typically eligible for DMPs. Secured debts, like mortgages or car loans are not eligible.

Operating in all 50 states, Apprisen and Money Management International are two of our top picks for debt management plans.

• Can only enroll unsecured debts: Mortgages, auto loans and other secured debts aren’t eligible
• Doesn’t reduce your principal: Unlike debt settlement, you must still pay your original balance in full
• You’ll have to close accounts: You’ll likely have to close most or all of your credit cards when you enroll and can’t apply for new loans or credit cards while on the plan.
• Credit score impact: Closing multiple credit accounts can cause your credit utilization to spike, which can lower your credit score.
• Fees: While the agencies are nonprofits, they charge startup and monthly fees that can add up to thousands of dollars.
• Requires strict commitment: Missing payments can cause your creditors to nullify the plan and reinstate old charges.

If you’re able to set aside extra money to put toward your bills, two popular debt payoff strategies are the avalanche method and the snowball method.

With the avalanche method, you continue to make the minimum payment on your accounts and put anything extra toward the debt with the highest interest rate. Once you clear that card, you can move on to the next debt with the highest interest, and so on. The idea is to pay as little as possible in interest.

The goal of the snowball method, on the other hand, is to keep you motivated. You’ll continue making minimum payments, and focus extra money on the account with the lowest balance. For some people, being able to see a “win” early on is motivation they need to keep going.

2. Balance transfer credit cards

A balance transfer card lets you move a high-interest credit card balance to a new card with a lower APR. Some cards come with a 0% APR welcome offer, so you can tackle the principal without accruing additional interest. Zero-interest periods can range from 12 all the way up to 21 months, depending on the issuer and your credit history.

You’ll pay transfer fee on each balance you move, usually 3% to 5%. You’ll also need to pay off the new balance before the welcome bonus expires or you’ll get hit with the card’s standard interest rate — putting you right back where you started.

The Wells Fargo Reflect® Card and the Citi® Diamond Preferred® Card both have generous intro APR periods and don’t charge annual fees.

A debt consolidation loan streamlines multiple debts into one monthly payment with a lower, fixed interest rate. Many lenders will even pay your lenders directly. You may have to pay an origination fee, which can range between 1% and 10% and is deducting from the amount you are gien.

LightStream can provide same-day funding and charges no origination fee or late fees. If you have shaky credit, Avant approves debt consolidation loans for borrowers with 550 FICO Score.

4. Debt relief companies

If you feel like you’re in a neverending debt cycle or can’t make your minimum payments, a debt relief company may be able to get your creditors to agree to accept less than the full amount owed. They typically don’t work with secured debts, like mortgages or auto loans, and fees for debt relief can range from 15% to 25%, depending on state regulations and the amount enrolled.

It can cause serious damage to your credit score, but debt relief companies report being able to reduce balances by as much as 50%.

Freedom Debt Relief and Accredited Debt Relief both have decades of experience negotiating with creditors and have positive reviews on Trustpilot and the Better Business Bureau.

5. Bankruptcy

Bankruptcy can help people who can’t keep up with their debts get a fresh financial start. Chapter 7 bankruptcy generally involves selling assets to pay creditors, with any remaining eligible debts discharged, or written off. Chapter 13 bankruptcy creates a court-approved structured repayment plan, typically lasting three to five years. Filing for bankruptcy generally triggers an automatic stay, which stops most collection efforts, including calls, wage garnishments and lawsuits. Not all debts can be discharged, however, and bankruptcy can have a significant impact on your credit.

If you are considering bankruptcy, consult a credit counseling service or bankruptcy attorney to understand what your options and obligations are.