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An elderly man giving his grandson a hug and smiling after signing up for a debt management plan

When creditor relief is needed, a debt management plan can help fix things.

For those with considerable debt problems, a financial counseling session is an effective first step toward learning to manage your finances better. It can also help you determine if entering into a debt management plan (DMP) is appropriate.

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What is a debt management plan?

Debt management plans are a means of getting you back on the road to a financially stable, debt-free life.

How this works

NFCC Certified Financial Counselors help set up a voluntary agreement between you and your creditors. Each month, you deposit an agreed upon amount with your credit counseling agency, who sends those funds directly to your creditors. By participating in this type of debt management program, you may benefit from reduced or waived finance charges or fees, and experience fewer collection calls.

When you work with an NFCC agency on a debt management program, your accounts are credited with 100 percent of the amount you send in. When you have completed your payments, which typically takes 36–60 months, the fact that you did repay your debt in full, and according to the plan, may help you reestablish credit.

Debt management plans and your credit

Participating in a debt management program won’t have any negative effect on your credit score. Though there will be a note in your credit report that says you’re enrolled in a debt management plan, it’s not something FICO uses when determining a credit score.

In fact, certain aspects of a debt management plan have a positive impact on your credit score. Your timely payment history, which accounts for 35% of a FICO credit score, will positively impact the score as will the decline in the amount you owe, which makes up 30% of the score.

Because you are involved in a debt management plan, there won’t be any inquiries for new credit, which is 10% of the score. Opening a lot of new accounts in a short period of time has a negative effect on your score.

In the end, participating in a debt management plan will be a positive factor in terms of your credit.

The debt management difference:

Debt management plans vs. debt settlement

Not all debt relief options are the same, especially when it comes to debt management plans and debt settlement offers.

A man and his elderly father smiling and holding hands after discussing a debt management plan

Debt management plans

A debt management plan involves working with a financial counselor to affordably repay all your debt while still working to achieve other goals. This helps take stress off your credit score, while enabling you to build your personal savings or even purchase your first home.

Independent research from The Ohio State University has demonstrated the positive financial impact of financial counseling that accompanies a debt management plan administered by NFCC Member agencies. Most of these plans allow participants to repay all their unsecured debt within a period of only three to five years, thanks to the cooperation of creditors who can reduce interest rates and eliminate fees on the enrolled accounts.

A middle-aged woman signing up for a non profit debt management program

Debt settlement

Debt settlement is an option that involves negotiating the forgiveness of a portion of your total debt balance. Once negotiated, the remaining portion is repaid in installments over a short period of time.

The forgiven portion is considered taxable income if it is $600 or larger, which can leave you owing more money when it’s time to file your taxes. While you can negotiate settlements without assistance, there are for-profit corporations that market the service for a fee.

The Federal Trade Commission, Consumer Financial Protection Bureau and countless other consumer advocates have cautioned people about the risks of dealing with for-profit debt settlement companies.

In their own words: Hear from people we’ve helped

Tiffani A.

In a few short years, I’ll be debt free and able to breathe again.