What Is Debt Management? We humans have been borrowing for thousands of years now. Debt, in itself, is not a bad thing. The key is how you utilize it and what’s your plan to repay it. If you are not paying back debt faster and it is accumulating then you are in for trouble. When you are drowning in debt, monthly payments of your credit card bills irk you, you get late fees notices, you skip some payments…it’s time you consider a debt management plan.
Definition: A debt management plan is an agreement between a debtor and a creditor that addresses the terms of outstanding debt. Debt management plans help reduce outstanding, unsecured debts overtime to help the debtor regain control of these finances.
You engage a credit counseling agency who will negotiate on your behalf with your lenders. You can get a list of such non-profit credit counseling agencies by searching online. Departments like the National Foundation of Credit Counselling, Financial Counselling Association of America and the Department of Justice have a list of accredited credit counseling agencies.
The agency will try to get relief from your creditors by reducing the interest rate, or waiving the late fees, reduce your monthly payment, or extending the tenure of the loan, etc. The debt management plan is only for personal or credit card loans which are not backed by collateral. We call them unsecured loans. Anything secured by collateral like a mortgage, auto loans are not covered by it. Debt management stretches anywhere from three to five years. You will not be allowed to use your credit cards during this period.
Difference between Debt Management, Debt Consolidation and Debt Settlement: Debt management may look similar to debt consolidation and debt settlement but there are some differences which we briefly explain below;
Debt Management and Debt Consolidation: In debt consolidation, you get a new consolidation loan or a balance transfer credit card of your existing debts. In debt management, you are getting a better and softer term for your existing debts. No new debt is raised. You also lose access to your credit cards in case of debt management but not in case of debt consolidation.
Debt Management and Debt Settlement: In debt settlement, you negotiate with your creditor to waive some part of your debt. In other words, some loan is forgiven. In debt management, the debt remains intact only the terms of payment are changed. Your credit rating also remains unfazed in case of debt management which is not the case in debt settlement.
How to succeed in a Debt Management Plan:
In order for a debt management plan to succeed you need to exercise maximum financial discipline upon yourself. Its success depends on you adhering to the following principles;
Spend less & Save More: You will need to cut your spending and make a habit to save a percentage of your income-howsoever small it may be. If you continue to spend in a negligent manner no debt plan is going to help you and you will be in financial dire straits again.
Make extra income: Find ways to make some more cash. Learn some new skills that are in demand, get a second job, freelance do whatever that can help you make some extra bucks. You can pay off your debts more easily with this additional income.
Dispose of extra assets: Take a look at your possessions and see how many you can live without. If you have two cars, manage with one. You can sell your house and get a smaller one or sell some fancy things that you bought on impulse. Anything that can help you get some cash which you can invest or re-invest to earn more money.
Pay your debts asap: The purpose of all the above is to make sure you get rid of your loans and debts as soon as possible. The longer the debt period the more interest you are likely to pay. So, relieve yourself of the financial burden at the earliest.
Benefits of Debt Management:
Peace of Mind: With your monthly payments and interest rates brought down you will be paying less to your creditors and more at ease. Financial worries can stress you out and you can heave a sigh of relief that your money matters are taken care of.
Credit Score: Your credit rating isn’t as affected as it would if you opt for bankruptcy or debt settlement. So that’s definitely a plus for your future financial dealing.
Reliance on credit counselor:
Since you negotiate with your lenders through a credit counseling agency or credit counselor there’s a risk of hanky-panky on their part. They may give you the wrong picture of the negotiations with your creditors. You also have to make sure that the payment you are making to them is actually going towards your creditors.
Missed payment: In case you miss a single payment of your debt management plan it could put the entire plan in jeopardy. The new plan would be hard to get by then.
Interest rate: It’s not easy to get lower interest rates. In fact, some lenders do not negotiate on the interest rates at all.
Restricted access to credit cards: During the course of the debt management plan you might lose access to your credit cars altogether or you can use them for a very limited range. This is a limitation of this plan.
In conclusion, we can say that a debt management plan is a good option if you are certain that a little respite in your payments can help you pay off your debts and you can use that breathing space to your advantage.