If you’re struggling with debt, you might feel like you have no way out. You might be tempted to ignore your bills, hoping they’ll go away. Or you might think that filing for bankruptcy is your only option.

But there is another way to deal with your debt: credit counseling.

Credit counseling is a service that helps you manage your money and pay off your debts. It can also provide you with financial education and resources to improve your financial situation.

One of the main services that credit counseling agencies offer is a debt management plan. A debt management plan is a program that allows you to pay off your debts in a more affordable and organized way.

In this blog post, we’ll explain what credit counseling and debt management plans are, how they work, what are their pros and cons, and how to find a reputable credit counseling agency.

What Is Credit Counseling?

Credit counseling is the term for a collection of money management and debt reduction services provided by certified personal finance professionals.

The organizations that provide credit counseling services are known as credit counseling agencies. Many are incorporated as private nonprofits, but some are for-profit businesses.

Credit counseling agencies typically do some or all of the following:

• Offer one-on-one consultations where you can discuss your specific financial situation and concerns
• Provide specific advice about managing your finances and paying down your debts
• Provide free personal finance education resources online or in print
• Sponsor free or low-cost personal finance workshops, either virtual or in-person (or both)

But the core service most credit counseling agencies provide is the debt management plan. It’s usually the biggest driver of income for credit counseling shops, whether they’re nonprofit or for-profit.

What Is a Debt Management Plan?

A debt management plan is an agreement between you and your credit counselor to pay off some or all of your debts within a specific timeframe.

The debts that you agree to pay off are known as “enrolled debts.” They’re unsecured debts, like credit card and personal loan balances. You can’t enroll secured debts (such as a mortgage) or student loans in a debt management plan.

Your counseling agency acts as the intermediary between you and any creditors included in the plan. The counseling agency may negotiate interest rate or penalty fee reductions with some or all of your creditors, although this isn’t guaranteed.

As part of the plan, you must make a monthly deposit into an escrow account. Your credit counseling firm uses these funds to pay your creditors and collect fees for its services.

All debt management plans come with fees. The most common are setup fees, which you pay to begin the plan, and monthly maintenance fees, which cover the credit counseling agency’s expenses as it negotiates with your creditors.

The setup fee is a one-time charge that’s usually under $100. The monthly maintenance fee typically ranges from less than $50 to $100, depending on how much debt you have and how many creditors are involved.

Under the Federal Trade Commission’s Telemarketing Sales Rule, your credit counseling agency must disclose these fees before you sign onto the plan. They also can’t collect any fees until you’ve made at least one payment to a participating creditor.

Depending on the size of your debts and your ability to pay, your debt management plan could take between two and five years to complete. Your credit counselor may allow you to pay more than your agreed-upon monthly payment, shortening the actual length of the plan. But don’t believe credit counselors who promise debt freedom in a matter of months.

Pros and Cons of Debt Management Plans

A debt management plan can help you regain control of your finances and eventually pay off your debts. Notable benefits include:

• Less Dramatic Alternative to Bankruptcy. A debt management plan is a less drastic alternative to declaring bankruptcy. Bankruptcy devastates your credit score and remains on your credit report for seven years or longer, so it’s really a last resort if your financial situation is out of control.
• Cheaper Than Professional Debt Settlement. Debt management plan fees add up over time, but they’re still usually lower than fees charged by for-profit debt settlement companies. The equivalent of a three-year debt management plan that costs you $3,000 total might cost $5,000 or more with a debt settlement company.
• No Need to Negotiate With Creditors. Your credit counselor negotiates with and pays creditors on your behalf, so you don’t have to interact with your creditors regularly. You should confirm that the credit counseling agency is making payments on time and in the correct amounts, though.
• One Monthly Payment Covers Everything. Your debt management plan should have a single umbrella fee that covers monthly payments on all enrolled debts, plus the agency’s fees. Also known as a contribution, this fee is typically paid monthly or biweekly (with each paycheck).
• May Include Other Useful Financial Services and Education. Most credit counseling agencies offer free or cheap financial counseling, educational materials, and workshops. These add significant value if you’re able to take advantage of them.
• May Increase Your Credit Score Over Time. Enrolling in a debt management program will probably hurt your credit in the short to medium term. But as you pay off old credit balances over time, your score should recover. If everything goes well, it should be higher when you’re done than when you enrolled.
• Confidential and Voluntary. Unlike bankruptcy, which is enforced by a court and becomes a matter of public record, a debt management plan is both confidential and voluntary for you and your creditors.

Enrolling in a debt management plan is better than declaring bankruptcy, but it’s not totally free of risks or tradeoffs. Consider these downsides before you enroll.

• Can Take Several Years to Pay Off Debts. Debt management plans take anywhere from two years to five years to complete, depending on the size of your enrolled debts and how much you can afford to pay toward them. They’re not a quick fix.
• Monthly Fees Add Up Over Time. That $50 or $75 monthly fee might seem reasonable, but it adds up over time. A $75 monthly fee costs you $3,600 over four years, for example. And that doesn’t account for your actual debt balance payments.
• Not All Credit Counseling Agencies Are Reputable. You have to be careful when choosing a credit counseling agency. Many are 100% reputable and want nothing more than to help you get out of debt. But others, especially for-profit agencies, have pushy sales teams, tack on junk fees, or don’t do what they promise.
• Can’t Enroll Secured Debts or Student Loans. Debt management plans are designed for unsecured debts, mainly credit cards. You can’t enroll secured debts like your mortgage or car loan. Nor can you enroll student loans.
• Not All Creditors Participate. Creditors aren’t obligated to participate in debt management plans. Many do because it’s their best chance of recovering some of what they lent you, but others like to play hardball, daring you to declare bankruptcy.
• Restrictions on Credit Use While Enrolled. Debt management plans require participants to close enrolled credit card accounts and refrain from applying for new credit for the duration. You may be allowed to keep a single credit card for emergencies, but your total credit limit will be much lower.
• Temporarily Harms Your Credit. Closing older credit card accounts can hurt your credit score. The effect isn’t as drastic as declaring bankruptcy or stopping payment on open accounts, as debt settlement companies require. But it’ll still take your score down a few notches.
• Small or Very Large Debt Loads May Not Be Eligible. Most credit counseling agencies require a minimum amount of enrolled debt, typically between $2,000 and $10,000. Many cap enrolled debt at $50,000 or higher. So if you’re struggling with too much or too little unsecured debt, you might have trouble finding a debt management plan that will take you.

How to Find a Reputable Credit Counseling Agency

You can get credit counseling services, including debt management plans, in any number of places. But as with any important financial decision, it’s best not to choose your agency in a hurry. Remember that a lack of past complaints doesn’t guarantee an agency will be aboveboard. Nonprofit status and sales tactics are more important metrics.

These are some good places to start.

• The National Foundation for Credit Counseling (NFCC) has high quality standards for its nonprofit members. NFCC members are prohibited from soliciting potential customers with pre-screened offers (similar to pre-screened credit card offers) for debt management plans, which is a potentially abusive tactic. They must receive accreditation from the organization before promoting themselves. And all of their employees must be certified as credit counseling specialists.
• Your credit union or bank may offer credit counseling services to its members or customers. If there’s nothing available in-house, you may be referred to a reputable outside agency.
• Your state or local government may have a consumer protection bureau that evaluates for-profit and nonprofit credit counseling agencies. Check your local and state government websites for resources in your area.
• The U.S. Department of Housing and Urban Development (HUD) contracts with local housing authorities to provide free or low-cost credit counseling services to homeowners. The advice and budgeting support they give are geared toward helping people avoid falling behind on their mortgages and risking foreclosure, but they’re qualified to speak about general personal finance issues too.
• The Better Business Bureau (BBB) compiles data, complaint histories, and client feedback about the country’s independent credit counseling agencies (both for- and nonprofit), as well as the larger organizations that offer credit counseling services. Check online or with your local branch for information about local options.
• The U.S. Trustee Program maintains a database of every nonprofit credit counseling agency that offers pre-bankruptcy counseling services. Each entry has contact information, service listings, and feedback from former customers.
• The U.S. Cooperative Extension System (USCES) is a financial education