Debt management is an integral part of financial growth and expansion. Without an effective debt management plan, you might struggle to remain financially relevant. If you owe a person or an organization, you must consciously strive to reduce the magnitude of the debt or deal with a debt collector at your doorstep, even if you aren’t able to pay it back at once.
If you have become a “chronic debtor” or someone struggling to get out of debt, you’ve probably realized that you’re doing something wrong. This can lead to your development of a necessary and effective debt management program, likely with the assistance of a debt management advisor.
To remain debt-free, you must live within your means – your expenses must not exceed your income. You’ll need to learn not to spend for the sake of it, but rather to spend on true necessities to achieve debt relief (and once you’re in a better place, you can splurge as we all do).
If you’re someone with a terrible spending record that’s left you in a hole of debt, the best thing to do get debt relief is to seek financial advice from a professional. This will go a long way in remolding your financial habits. Furthermore, don’t hesitate to read up on debt management, as there are thousands of debt management books out there, in addition to online resources (like the one you are reading now).
Debt Management Tips to Live By
Do you have an effective debt management plan in place? If not, follow these tips to help you get started.
- Begin by finding out exactly who you owe. Make a comprehensive list of all creditors, the amount owed, and due date. Be sure to refer back to this list every so often to keep yourself aware and stay on track with your management plan.
- Don’t delay paying off your bills. After you create a debt management plan, ensure that nothing holds you back. Fines for late fees might discourage you and deter you from sticking to the management program. That’s why it’s best to pay your essential bills on time (be they medical bills, student loan bills, etc.) and settle all of your debt in a given period. Keeping a bill and debt payments calendar is also a good way to keep you on track with your repayment plan.
- Decide which debts to pay off first. Your debt management list should be both chronological and prioritized. Most urgent debts in your management plan should get a place at the top of the list while the least urgent debts should rank lower for repayment. Take care of repayment that comes with a higher consequence or interest rate first, like credit-card debt, to maintain your creditworthiness.
- Pay off all collections. If you don’t have enough cash on hand to take care of this, try your best to ensure that your other accounts remain unaffected. Your creditors will not hold back from taking what’s owed from any of your accounts.
Is Debt Management a Good Idea?
Depending on your approach, a public debt management plan can either make or break your finances – a debt management strategy may not be the end-all debt solution for everyone. These structured management plans work best in providing debt relief to people who are in deep financial chaos with seemingly unmanageable debts hanging around their necks.
Does that sound like you? Maybe so. But before you go ahead and adopt a debt management policy, discuss your situation with a consumer credit counseling agency or a debt management advisor. These debt management experts will ultimately help you decide whether adopting a debt management plan is truly what you need.
How a Debt Management Plan Works
Again, don’t simply start yourself on a debt management policy, if your financial situation has not been reviewed exhaustively by a debt management company or a debt management advisor, as advised by the Federal Trade Commission. Keep in mind that there are comprehensive lists of approved agencies to help you out, each fully accredited by the United States Department of Justice.
After a comprehensive review, if a credit advisor thinks that a debt management plan is what you need to succeed, the advisor can arrange meetings with your creditors. This meeting is meant to help establish a flexible payment plan that meets your needs. With their help, you can also have the agreed interest rate lowered and fees reduced. The credit counselor can also negotiate for an outright waiver.
Debt Servicing
If your counseling agency can strike a deal with your creditors, debt servicing will be the next line of action. Debt servicing could involve depositing money on a weekly payment, monthly payment or quarterly payment basis. The debt management company receives these deposits and makes the payments on your behalf as part of your management plan.
Staying Disciplined
To make the most of your credit counselor’s advice, follow their debt management guidelines. But in order for this process to succeed, you have to be self-disciplined, diligent and dedicated. Know that you’ll be encouraged not to borrow any more money at this point, and the agency may ask that you close all of your credit cards to settle outstanding commitments. Yes, we know that doing so will lower your credit score, which might make you a bit reluctant. In the end, though, it’s better to have a lower credit score than be deep in debt.
Benefits of a Debt Management Plan
Debt management benefits go a long way to help you completely transform your spending and saving. A proper debt management plan can help you:
- Bring annoying frequent calls, texts, and reminders from your creditors to an end.
- Get lower fees and interest rates, as well as possible cancellation of your debt.
- Reconcile multiple debts into one to help you monitor and recall what you owe.
- Pay off all your outstanding obligations by a specific date.
- Make creditors aware of how serious you are about paying back your debts.
On the flip side, there are a few downsides to a following a debt management plan, with the main one being that it can adversely affect your credit score or rating. All debts will stay on your credit report for 72 months, after the date of payment or default. As we mentioned, debt management firms may request that you close all of your credit cards to prevent you from incurring more debt. A lower credit score or rating because of these closures could make it more difficult for you to get a loan in the future.
To add to that, negotiating to pay less than the amount you borrowed will damage your credit report. The report will indicate that you were unable to comply with the initial payment plan or agreement – and that won’t help you to get subsequent financial support.
Types of Debt Covered
A debt management plan doesn’t cover all types of debts. For example, it doesn’t help you take care of auto loans, mortgage loans, home equity loans and some forms of student loans. The following are any of the types of debts that are covered by debt management plans:
- Credit cards
- Personal loans
- Collection accounts
Debt Management Plans vs. Bankruptcy Filing
So, what’s the difference between following a debt management plan and filing for bankruptcy?
Reaching out to a debt management advisor means you’re trying to fix a situation that very likely can be fixed. You’re admitting that you’re in a terrible financial situation and you need an expert’s advice.
On the other hand, filing for bankruptcy means that you have decided to throw in the towel. It means conceding defeat and admitting to an unredeemable situation. When you file for bankruptcy, you are simply saying you cannot pay debts even if liquidation of assets takes place. Filing for bankruptcy hurts your credit score, too. You lose 200 credit score points in doing so, which will show on your credit report for at least ten years.
Paying Off Debt Quickly
Although a debt management program will help you fix your financial situation, how quickly you pay off your debt still depends on your dedication and commitment to paying far after the management program ends. It also depends on how often you have agreed to make deposits through the debt management agency. The higher your commitment and deposit frequency, the shorter the time it will take to achieve a debt-free status. You’ll achieve such a status faster if you stay true to the process; it’s merely a matter of discipline.
Practical Information to Know
Before you can kick off a debt management program, you, your creditors and a financial counseling agency or debt management expert need to come to an agreement. This agreement is informal because there’s no legal or judicial reason for all parties to agree to your terms.
Starting the Process: What Your Creditors Will Do
When you engage with a debt management firm, creditors will see this. After you enroll in a debt management plan, creditors should not call you about your debts. Every form of communication going forward will be conducted through the debt management agency. However, you will continue to receive statements from creditors so that you have a record of what you owe, and your payments made. Both you and your creditor can clarify discrepancies with the debt management agency. These cases could arise when there are delayed payments.
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How Much Do Plans Cost?
The cost of a debt management plan depends on the debt management company involved. Remember: debt management companies want to make money, too, and their charges will differ. While some firms charge a flat fee for services provided, others deduct from your monthly deposits, while others do both. In general, most debt management agencies in the country are non-profit credit counseling services, and you’ll be making monthly payments of $25-35 to them. You may also be required to pay a one-time setup fee to a non-profit credit counseling agency that varies from state to state, but usually doesn’t exceed $75.
Before you enroll for any debt management service, make sure you understand the cost implications and fees involved. Without this information, you may be creating even more debt for yourself. A debt management program should lessen your burden and not make matters worse. Excellent debt management services should not break the bank.
Length of a Plan
Typically, a debt management program lasts between three and five years after the date of enrollment. Within that period, all debts will be paid off. However, if you can achieve financial stability quicker than expected, perhaps covering your student loan, another personal loan and your mortgage, there isn’t a penalty for early payments of debts.
How to Enroll in a Debt Management Program
The National Foundation for Credit Counseling (NFCC) is in charge of regulating and controlling the activities of debt management companies, which includes partnering with financial counseling agencies. To enroll in a debt management program, reach out to any of the available non-profit credit counseling agencies near you. They will demand information concerning your income and expenses before leading you down the path toward repayment.
You can enroll in debt management programs online, but you must first know that this is what you actually need. This can only be done by having at least a phone conversation with a credit counselor from a reputable debt management firm.
Sharing Information with Credit Counselors
Generally, it’s best to fully cooperate with counselors and refrain from holding back any information. The more information the certified credit counselor has available, the easier it will be for them to offer professional advice. The credit counselor will also ask for information about your credit report, so come prepared with that list we mentioned earlier on: a detailed account of your creditors and how much you owe them. You can also get your credit report in advance (and for free) via sites like AnnualCreditReport.com.
After your initial chat with a credit counselor, you’ll be told whether or not you’re in need of a debt management plan. The counselor will also provide tips and advice on how best to get yourself out of your financial rut. If a debt management plan isn’t the remedy, you may need to opt for debt settlement or declare bankruptcy.
After Enrollment: Credit Card Usage and Interest Rates
Enrolling in a debt management program does not stop you from using your credit card. However, it’s probably best that you do refrain if you can avoid it. Continued irresponsible use of your credit card will counteract the positive effects of a debt management program. The amount you owe will only continue to increase, and the expected payoff date will be pushed back. When you stop using your credit card, debt management companies will see this as a sign that you’re seriously committed to the program.
Interest Rates
If you enroll in a debt management program and include your credit accounts in the plan, you could be qualified for some benefits after negotiations with credit issuers. For example, your interest rate could be reduced on your accounts – you’d be paying back all outstanding payments at a rate that’s lower than what was established in the initial contract. So, enrolling in a debt management plan can significantly affect the interest rate on your credit accounts.
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The Cans and Cant’s of Debt Management Plans
Below are a few common questions asked about what you can and can’t do while on a debt management plan. Fear not – you’re not a complete slave to your debt.
- Can I buy a house while on a debt management plan?
Mortgage lenders pay particular attention to your credit rating. If you have a great debt-to-income ratio and you have a high credit score, you’ll be more likely to be considered. A debt management plan won’t be the factor that holds you back from buying the house of your dreams. The plan is a good thing: it’s an avenue to clear every debt you have.
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- Can I get a mortgage after debt management?
Yes, you can. Successful execution and completion of a debt management plan mean you are free from all forms of financial obligations. Your credit rating will also see a massive boost, although not immediately. Your mortgage request should be approved once the mortgage lender thoroughly reviews your financial condition. However, this decision also depends on your credit rating and how successful you were at following that debt management plan.
- Can I negotiate a settlement for credit card debt?
Credit counselors do handle credit card loans in debt management plans. They can help you strike a deal with your credit card company, in order to pay less than the amount borrowed. This is called a lump-sum settlement. However, this will only work if you have enough funds to pay upfront. Your counselor can also help you get an interest waiver, in which you’d only pay the principal amount on the credit card.
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- Which types of loans, debts, and accounts can I include in a debt management plan?
We already covered the fact that debt management plans can’t be the solution for every type of loan or debt out there. Debt management plans only cover certain types of loans and accounts: credit card loans, personal loans (like private loans and utilities) and collection accounts. Mortgage loans and auto loans, however, can’t be included in a debt management plan.
- Can a debt management company leak my information to third parties?
No reputable debt management firm will disclose a client’s information to a third party. They need to be privy to sensitive information about an individual’s finances. Every detail you have entrusted them with will remain confidential. Before you join a debt management company, be smart and go through their privacy policy. If they happen to disclose your information to a third party, you may be able to sue them for breach of trust.
Best Debt Management Plans to Follow
As there are many debt management facilities to choose from, you should carefully analyze prices, reputation, customer service, and success rates. Here are a few top debt management firms to consider:
- InCharge Debt Solutions: These guys have a great website and boast a team of experienced credit counselors that help with credit card debts (but you may need to look elsewhere for an unsecured debt). InCharge gives you access to your account status with a progress bar, and they charge $29 per month on average.
- Money Management International: Founded in 1958, they are one of the biggest debt management companies that offer appropriate solutions for your debt and financial concerns. They charge an average of $25 per month and have experience matters like bankruptcy and home buying.
- GreenPath Financial Wellness: With award-winning counselors in their 60 GreenPath debt branch offices across the country, GreenPath Financial has an interactive website and a monthly service fee of $36.
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Is Debt Management Right for You?
There may be times when debt management plans or a similar debt service just don’t work for you. If your expenses outweigh your income, for example, sustainability becomes an issue. This calls for an alternative solution, such as debt settlement or filing for bankruptcy (the former would depend on debt settlement companies). Your counselor might also notice that you’ve been spending too heavily and advise you on proper budgeting and reduced spending. This is a great first step to ensuring a higher income to cater to your necessary expenses and debts.
Regardless of your chronic financial situation, if you’re in a money pit and can’t get out of it alone, take the first step right now. Reach out to a debt management firm and start putting yourself on the path to debt freedom.
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