A debt management plan is simply a way of managing debt, which often involves a third party. Although choosing a plan may seem confusing and daunting, once you consider all your options, it is not as difficult as it may first appear. However, it's important to understand each option in order to choose correctly.
Debt Management Through Credit Counseling
Under this debt management arrangement, credit counselors may contact your creditors to lower or eliminate interest rates, as well as any late fees. Many credit counseling agencies have a network of credit companies, which makes it possible for them to negotiate your monthly payment.
Unless you choose a non-profit organization, you're expected to pay a fee, which can range from about $20 to more than $100 per month. Moreover, the credit counseling agency normally keeps a percentage of the amount it collects from you.
Points to consider:
- The program normally takes about 48 months to complete.
- This debt management plan can generally help you manage your unsecured debts, such as collection agencies and credit card balances.
- This debt management option does not cover secured debt, such as vehicle loans or mortgages.
- More than 50 percent of consumers who choose credit counseling as a debt management solution, drop out of the program before completing it.
- Not all creditors are willing to participate in a debt management program.
- Your monthly payment does not always decrease, and in some instances, it could even increase.
- Some counseling agencies offer financial advise to avoid debt in the future and offer tips on how to keep your finances under control.
Debt Consolidation As a Debt Management Solution
There are different approaches to debt consolidation. Notice the following debt management choices:
- Debt consolidation services - This debt management solution allows you to have one monthly payment. You turn over all your unsecured accounts to the agency. Debt consolidation agencies generally forward your monthly payment to your creditors, and receive a certain percentage rebate from the creditor.
- Consolidation loan - Another type of debt management plan involves taking out a loan to pay off your unsecured debt as well as secured debt. If you have good credit, you can often secure a loan from your personal bank to pay off all your creditors. You can then make one monthly payment to the bank.
- Home equity/cash-out loan - You can leverage off the equity on your home to pay off all your creditors. However, this type of debt management could cause you to lose your home if your financial situation changes and you cannot make the monthly payment.
Debt Management and Debt Negotiation Services
Consumers often ignore how this debt management choice works. With this plan, you enroll in the program, pay a fee, make a monthly payment and the debt negotiation company takes care of the rest. It may sound like the ideal solution, but there is more to it. Creditors don't negotiate or settle until you're behind on your payments. This means that if you're current on your unsecured monthly bills and simply want to be debt free, this debt management plan is most likely not what you want. Here's why.
The negotiating agency will receive your monthly payment and place it in an account without making any payments to your creditors. After a period of not having any payments posted to your account, your creditors are generally willing to negotiate. At that point, the agency will make an offer and negotiate a settlement.
If you're concerned about maintaining a good credit rating, this debt management procedure can hurt you more than you realize. You will have a late payment history on your credit report. Your credit report will most likely show that the debts were settled and may show the unpaid difference.
Debt Management Self-Help Tips
If you're current on your bills, the following tips can help you create your own debt management program:
- Stop incurring new debt.
- Make a budget.
- Save for an emergency.
- Pay off your debts from smallest to largest. You may refer to the resource section of this article for additional tips on how to get out of debt.
If you're already behind on your bills, contact one creditor at a time and negotiate a settlement. They may settle for about 50 percent or less, depending on how long it's been since your last payment.
Financial debt can be overwhelming and debt collectors don't make it any easier for you. However, if you set up an emergency fund and then focus on paying off or settling one debt at a time, you may be surprised at the results you can achieve. If you're already behind on your payments, don't let collectors intimidate you. Think clearly, stay calm and act rationally. Doing so can help you choose the best debt management option.
Copyright © 2011 Ana Jackson. All Rights Reserved. Reproduction in whole or in part constitutes plagiarism, is illegal and strictly prohibited.