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How Credit Counseling and Debt Management Plans Really Work

Did you know that the average household in the United States is approximately $15,000 in debt, excluding the mortgage?

This means that if you have become overextended financially, you’re hardly the only person experiencing what you’re going through.

The other news you’d probably like to hear is that there are strategies you can implement to help you regain control of your debt and your finances. Two of these strategies are credit counseling and developing a debt management plan.

Credit counseling, also sometimes referred to as debt counseling, is simply a process between a creditor and the debtor to help determine the best course of action to take to reduce and eliminate the debtor’s outstanding debts. Credit counseling has been around since the latter half of the 1930s, so it’s hardly a new option you can turn to for help.

A debt management plan, also sometimes abbreviated as DMP, is simply an agreement between the creditor and the debtor to help reduce outstanding debts via a debt reduction, extended payment terms, reducing the interest rate, or other means.

Oftentimes, the terms ‘credit counseling’ and ‘debt management plan’ are used interchangeably. But as we will soon explore, in reality they are very much different from one another. Credit counseling is really about education on how to reduce debt, whereas a DMP is an actual plan or program you follow with the creditor or credit counseling group in order to reduce and eventually eliminate it.

We’ll discuss both credit counseling and debt management plans in much greater detail, and in addition, we’ll also talk about many myths concerning the two that are often circulated as well.

By the end of reading this article, you will have a full understanding of credit counseling and DMP’s and what they are and aren’t, so you can make a more educated decision in regards to what the best course of action for you to take will be.

Credit Counseling

Credit counseling (also known as ‘consumer credit counseling’) organizations are usually classified as 501(c)(3) non-profit education entities under current IRS tax laws.


The counseling organization will be able to help you with your debt and your finances in a number of different ways, including but not limited to:

  • Advice and counseling on how to manage your finances and pay back your debts
  • Setting a budget
  • Offering educational workshops
  • Offering a DMP to help you pay your debts

In short, a credit counseling organizations will help you with your debts through offering advice or by organizing a debt management plan, where you will make monthly payments to the counseling organization, who will then pay the money to your creditors.

We’ll discuss DMP’s in much greater detail later in this article.


Once you have selected a credit counseling organization to work with, you will be paired with a credit counselor who you will meet with either in-person or over the phone.

The average counseling session will last around one hour, though they can be shorter or longer depending on your specific situation, and will happen after the counselor has assessed your present financial situation to see how much you are in debt.

During this session, the counselor will offer you help on setting a budget, provide you with a free review of your debts and income, and outline steps that you need to take in order to improve your current financial situation.

As a last resort option, the counselor may also work with you to develop a debt management plan. As we will talk about later, a debt management plan will set up a monthly payment plan and perhaps even lower your interest rates or the overall amount you owe in order to reduce your debt.

If you do discuss a DMP with your counselor in detail, it will usually be because your counselor has suggested or recommended it as being the best course of action to take. Otherwise, the counseling session may not include discussion of it.

CC Advising does not offer Debt Management Plans, nor do we receive referral fees for recommending them. After analyzing a client’s particular financial situation, if we feel a client may benefit or qualify for such an option, we will recommend that they speak to a third-party agency which may be able to provide that service. The majority of our clients are pre-bankruptcy clients who have already exhausted all other options to resolve their debt issues, so it tends to be rare that we would have a client who qualifies.


The short answer to this question is it really depends on the specific counseling organization you’re working with.

But in general, you’ll be glad to hear it shouldn’t be expensive to seek credit counseling. Most counseling agencies will only charge you small fees in the twenty to fifty dollar range.

Most counseling organizations will only charge you fees based on what you can afford, and others will even offer voluntary fees.

Something to take note is that if a counseling organization does offer voluntary fees but attempts to keep or hide this information from you, it’s a good indicator that you should look for another organization instead.

Debt Management Plans (DMPs)

As discussed previously, debt management plans are an actual plan or program set between you and the credit counseling group in order to repay your debt.


Under a DMP, you will pay the credit counseling group a monthly payment, which the group will then divide up and pay to the creditors you owe money to.

In other words, the counseling organization will act as a third party to more easily facilitate the transactions between you and your creditors and to ensure that your debt is actually paid back.

You should take note of the fact that a debt management plan is NOT the same thing as debt consolidation, even though it is often referred to as such. Additionally, if your credit counseling organization does refer to it as consolidation, you would be wise to seek help from another counseling organization instead.

The credit counseling organization will earn money from this arrangement by charging you a monthly fee, which usually amounts to five percent or less of the money that they collect from you. This amount will be referred to as the ‘fair share.’


When you enroll in a DMP plan, you will be unable to negotiate terms with the counseling organization because the organization is instead paying your money to the creditors.

Therefore, the creditors will set the terms, and you will have the option to agree to the terms of the plan or not.

Fortunately, something you can do is to get into contact with your creditors in order to see better terms under the plan.

In addition, the credit counseling agency will also work with your creditors in an attempt to waive late fees, lower your interest rate, and perhaps even lower the overall amount of money you owe. These factors will help translate to an overall lower monthly payment.


There is one significant downside to enrolling in a debt management program, and that is all creditors who agree to your plan will close your accounts for the duration of it.

This means that if you have any credit card debts linked to your plan, you will be unable to use those credit cards until after the debt has been paid in full at the plan’s conclusion.


While it really comes down to how much debt you owe under the plan, the average debt management program will last around five years.

It will also continue until the entire debt under the plan has been paid off. The exception to this is if you default on enough payments, in which case the plan will most likely be cancelled by the credit counseling organization.

Common Myths Concerning Credit Counseling and Debt Management Plans

While many people are fully aware about the existence of credit counseling and debt management plans, far fewer truly understand how either of them work and believe an abundance of misinformation and myths that are out there.

We’ll go over these myths and what the facts are to help you even better understand how credit counseling and DMPs work:


While debt management programs are certainly an option to help you eliminate your debt, they are also not the only option that you have available to you.

In fact, it’s perfectly possible to reduce debt on your own by taking action yourself. For example, another option you could pursue would be a debt consolidation loan.


While it is true that credit counselors might be able to reduce your fees and interest rates by working with your lenders to then lower your monthly plans by a small amount, the chances of them reducing your monthly payment by fifty percent are practically non-existent.

In addition, if your credit counselor is telling you that they will be able to reduce your monthly payments by that or a similar rate, chances are you’re really talking to a debt settlement company.

More often than not, your creditors will not agree to waive your fees or lower your interest rates, at least not by a significant amount.

NOTE: with a debt settlement company, you will transfer money into an escrow account, and once enough money has been saved into the account, the settlement organization will contact you to release the money to pay back your unsecured debts.


This is easily one of the biggest myths concerning DMPs in general. Any payments you’ve missed will already be on your credit reports and they will remain there forever.

But as for the DMP itself, it will not have any affect on your credit score either way, and therefore your actual credit score will not be changed.

That being said, when future creditors and lenders view your credit history, many of them will like to see that you paid back your debts through a debt management program because they will see that you took the necessary action to pay back your debts.


Not true. Chances are best that some of your creditors will agree to the plan and others will not.

To be more specific, chances are good that only unsecured creditors will be interested in participating in the program, or a creditor that lends money without gaining assets as collateral.


Not exactly. Remember that you will pay a monthly fee of five percent or less of what you are paying to the counseling organization.

So to put this into perspective in a hypothetical example, if this monthly fee amounts to $75, that means that you will owe the counseling organization $900 for the year, and $4,500 over the course of a typical five year debt management plan.


To conclude, seeking education on how to pay back your debts and retake control over your finances with a credit counseling organization can be a very beneficial thing for you to do.

But taking that a step further and enrolling in a debt management plan will only be beneficial to you depending on what your situation is. If you are considering bankruptcy and have already discussed your situation with a competent bankruptcy attorney, chances are good that you have already exhausted all other options to resolve your debt issues. Many clients wait until the last possible second to retain a bankruptcy attorney, and their alternative options are limited.

On one hand, working with a credit counseling organization and enrolling in a debt management plan is a good way to ensure that you actually pay back the money you owe to your creditors, gives you peace of mind knowing that you actually have a plan in place to reduce your debt, and could possibly help your interest rates to be reduced, even if it’s only by a minimal margin.

But on the other hand, a debt management plan can cost you a lot of money over the long term, won’t help your credit score, and most likely only your unsecured creditors will be interested in participating in the program.

The best strategy for you to follow will be to thoroughly evaluate your financial situation and determine your goals.

Debt management plans are generally only meant for those who are very deep into debt.

It’s still perfectly possible for you to pay back your debt on your own, and if you feel you can without the assistance of a counseling organization, by all means you should. Debt management plans can either be the perfect solution you’ve been looking for to pay back your debt, or they can do you more harm than good.



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