I am thinking about enrolling in a debt management plan with a credit counseling agency, and I would like to confirm my understanding before I go ahead. Say I owe $10,000 and the plan brings it down to $8,000.
Would I be allowed to pay off early, with bigger monthly payments or a lump sum settlement, and would a lump sum be around 35% of what is left in the plan? Should I fall behind on a payment or two before I start, to get a better interest rate? And if I drop out of the plan later, is settling still an option?
—D.
Short answer
No. You can pay off a debt management plan early, but that means paying the full balances sooner, not settling for less. You will not settle anything for less while you are actively enrolled. If you later stop paying a creditor in the plan, negotiating a settlement with that creditor is fairly common.
Key points on this page
- You can pay off your debt faster in a DMP, using a bonus at work, a tax refund, or something similar, but that is paying the full balances sooner, not settling
- Banks offer their best settlements when you are a few months late or more, so a discount while you are in a DMP would typically be too small to justify the credit hit
- Do not miss payments before you start. Enrolling in a DMP without late payments often means little to no credit score drop
- Not all creditors take part in DMPs. Many smaller banks, credit unions and fintech lenders do not
- Accounts you had to leave out of a DMP can still be settled while you keep up with your DMP payments
- If you stop paying a creditor in your DMP before completing it, you can typically negotiate a settlement with that creditor
You can pay off your debt faster in a debt management plan. Many people do. But it is not settling. You are simply paying the full balances owed more quickly, by using a bonus at work, a tax refund, or something similar.
You will not be settling anything for less while you are actively enrolled in a DMP.
Virtually all banks offer their best settlements when you are a few months late or more. If one did approve a settlement while you are in a debt management plan, any discount would typically be too small to justify taking the credit hit from settling. Which is a good point to bring up… even if you did settle for less without being late while in a DMP, the credit damage is the same as it would be if you went late enough to get the best savings when settling.
Two different debt solutions
Much of the confusion here comes from mixing up two different things: settling debt for less than what is owed, and enrolling in a debt management plan with a credit counselor. I compare the two debt relief options more fully in 5 ways to compare credit counseling with debt settlement.
Whether or not your credit bounces back from settling a debt for less than what is owed will vary from one person to the next. If credit reporting is part of the decision for you, read how debt relief options impact your credit score and access to financing.
Should you fall behind before starting a plan?
No. I encourage you to start working with a credit counseling agency without missing payments. You can certainly enroll in a DMP with already missed payments, and the credit score damage that comes with that. But at some point, and maybe with as little as 30 to 60 days late on your credit already, you start thinking about settling the debt for less instead of the DMP.
The credit counseling companies have preset deals with your banks. They can do things to get your monthly payments lower that you and I sometimes have to miss payments on before we can get the bank to do something advantageous with our interest rates. That is, if we can get some creditors to drop the interest at all. There are some large banks in the USA that refuse any meaningful interest rate reduction until you are already charged off (6 months late).
Enrolling in a DMP without late pays will often mean you experience little to no credit score drop at all.
If you drop out of the plan later
You can typically negotiate a settlement with a creditor that was in your DMP, but whom you stopped paying before completing it. That is fairly common. Before you commit to a plan, read the top drawbacks to a debt management plan, so you know what a plan looks like if something unexpected keeps you from finishing it.
I should also point out that not all creditors participate in nonprofit credit counseling companies debt management plans. Most major banks do, but smaller local and regional banks may not. Many small credit unions do not. Many of the fintech marketplace lenders like Sofi loans, Upstart, Upgrade, and others, do not offer any interest rate reduction through a DMP, or to you directly for more than a month or three.
If you have some accounts in a debt management plan, and had to leave others out, you can still settle the ones you kept out while keeping up with your DMP payments.
Anyone with questions about accounts that will work in a DMP, and those that will not, post in the comments below for feedback. If you want to do a side by side comparison of what your payments will be in a DMP, set beside what I estimate they will be in a settlement, and how long your credit will stay depressed, schedule a call with me. I offer that detailed information in a one on one call at no charge.
