What Is Debt Management? Tactics To Lower Your Debt

WAYHOME studio/Shutterstock.com

Dealing with debt can be a real challenge. The average balance per consumer rose from $5,947 in 2023 to $6,329 in 2024. Between late fees, variable interest rates and lifestyle changes, it’s easy to fall behind and get stuck in an unwanted financial situation.

You don’t have to face your debt alone. Strategies and resources are available to help alleviate your payments and guide you out of this predicament. This will be done using a process known as debt management.

What is debt management?

Debt management is the process of planning and organizing how you’ll pay off your debt. This is typically accomplished by creating a debt management plan (DMP) which outlines your outstanding balances and how they will be eliminated.

You can create a debt management plan by yourself or through credit counseling. Each path has advantages and disadvantages. Setting up a plan on your own is the simplest way forward, but sometimes it can be helpful to have an outside partner to provide negotiation assistance and accountability.

In general, debt management plans only apply to unsecured debts like credit cards and personal loans. Debts that have collateral (i.e., property the lender can seize), such as mortgages or auto loans, would not be included. DMPs also exclude tax debts, legal fines, child support and alimony.

How does debt management work?

The main goal of any debt management plan is to advance you toward becoming debt free. This could be through any combination of the following:

• Strategically prioritizing payment of certain debts over others
• Getting a lower monthly payment or interest rate through negotiation with the lender
• Working with the creditors to pause interest charges, forgive late fees or reduce some portion of your debt

Most debt management plans occur in one of the following three ways.

DIY debt management

A DIY (do-it-yourself) debt management plan is one you create on your own. With this version, you’ll examine your budget, determine how much funds you can apply toward your outstanding balances and then execute a plan for success.

Two widely popular approaches are the debt snowball and debt avalanche methods. Both approaches involve arranging your debts (either by balance amount or interest rate) and then systematically paying them off one by one.

You can use budget calculators, repayment calculators and financial management apps to keep you on track. If necessary, you can try negotiating with your creditors to lower your monthly payments or interest rates. Once the debt is under control, you can keep or close the account.

• Best for: If you struggle with overspending but can afford to make monthly debt payments by being more disciplined, this approach could work for you.
• Biggest advantages: You can protect your credit rating by making timely monthly payments and paying in full. There’s also the opportunity to create a realistic plan with milestones and a debt-payoff date to keep you motivated during the repayment journey.
• Biggest disadvantages: You won’t have insight from a professional who may have more effective strategies to get out of debt faster. Furthermore, creditors may not be open to negotiations.

Debt management with a credit counselor

Another commonly used form of debt management is credit counseling. A credit counselor works on your behalf to construct a debt management plan and help you stick to it.

Credit counselors are experienced at negotiating with lenders and can often get them to make concessions such as reducing your minimum monthly payments, waiving fees or even lowering your interest rate. The counselor will then lay out a payment schedule to get you debt-free over the next three to five years.

You can find a credit counselor through the National Foundation of Credit Counselors. Note that there are both nonprofit and for-profit credit counselors. Before partnering with one, read reviews and understand any fees involved.

• Best for: People who want professional help managing their finances and credit score.
• Biggest advantages: A DMP is generally a more cost-efficient way to get out of debt than paying creditors directly. You’ll get a set monthly payment and debt-payoff timeline if negotiations are successful. The collection calls will stop. Plus, the impact on your credit score won’t be as significant as if you settled the balances for less than you owe.
• Biggest disadvantages: You may not have access to your credit accounts for the duration of the DMP. Plus, you’ll give control of your debts to the counseling agency. Typically, you’ll make a single monthly payment to the agency each month, which it then distributes to your creditors.

Is debt management right for you?

A debt management plan can be extremely helpful in your efforts to overcome debt. You might be a good candidate if you:

• Have multiple high-interest, unsecured debts such as credit cards or personal loans.
• Are nearing or at the maximum credit limit for each account.
• Have reliable income to make your payments.
• Don’t anticipate needing a new line of credit soon (such as a new credit card or even a mortgage).
• Prefer that an agency or company negotiate your DMP rather than doing it yourself.
• Acknowledge that you have risky financial habits such as overspending or missing payments.

Please note that a DMP is not a one-size-fits-all solution and does not address other potentially critical issues such as missed mortgage payments. In those situations, you might also want to utilize a credit counseling service for housing guidance and foreclosure prevention.

What are alternatives to debt management plans?

While a DMP has its benefits, it may not be the best fit for all occasions. The following are some other approaches for managing your debt:

• Balance transfer credit cards: Moves your outstanding balance from one credit card to another. However, the new credit card will have a 0 percent APR for the next six to 18 months, allowing you to pay it down without interest accumulation.
• Debt consolidation loan: A loan gives you a lump sum of money you can use to pay off your current outstanding balances. This arrangement works great if the consolidation loan has a lower overall APR than the average of your other debts. However, it’s a new loan you will legally be obligated to repay.
• Bankruptcy: This is a last resort option where the courts relieve your debt obligations. However, if you enter Chapter 7 bankruptcy, it can also include the relinquishing or selling of non-protected assets such as your home or vehicle. You should always speak to an attorney or financial advisor to understand the potential repercussions before taking this route.
• Debt relief company: Debt relief companies work by negotiating with your lenders to reach a settlement deal for less than what you owe. However, it’s important to note that some experts consider debt settlement worse for long-term financial health than bankruptcy.

The bottom line

You don’t have to get stuck making payments that never seem to get you out of debt. A debt management plan can help lay the groundwork for paying down debt and save you money in the long run.

Whether you decide to work alone or with the help of an external service, what’s important is that you take action. Consider each approach’s potential advantages and disadvantages and choose the one that works best for your financial situation.

Frequently asked questions

• Do you have to commit to a debt management plan?
  

  You are not legally required to commit to a DMP. Most plans are informal agreements that can be canceled at any time. However, if you cancel, you may lose any benefits negotiated with your creditors. Plus, you’ll most likely forfeit any fees you’ve already paid.

• Does a debt management plan affect credit?
  

  Because of the tactics used with DMPs such as hard inquiries, reduced/withheld payments or closing accounts, you’ll generally see a negative impact on your credit score. However, this should improve over time with consistent repayment and the eventual elimination of your outstanding balances.

• Do I have to close the accounts in my debt management plan?
  

  Nearly all creditors close any account that falls under a DMP. Additionally, they won’t be available to reopen after exiting the DMP. If you need to keep one credit card open for emergencies or online purchases, clarify that with the credit counseling service before signing up.

• Can I still be taken to court if I have a debt management plan?
  

  DMPs do not offer legal protection, and creditors are not obligated to accept the credit counselor’s terms. This means debt collectors can still contact you or take you to court.