It’s well known that credit cards are by far easiest way to rack up debt. The convenience of swiping a plastic card rather than producing actual cash combined with low minimum payments makes it seem as though you can spend more than you earn without paying the price. However, as anyone who has ever struggled with credit card debt knows, this is far from the truth. Credit card debt may be deceptively easy to get into, but it’s incredibly difficult to get out of.
Debt management is a financial tool available to individuals who have found themselves in over their head with credit card debt. Unlike secured debt, such as car and loan payments, there are no tangible assets involved. This means that the credit card companies can’t take your home or car when you fail to make payments, but what they can do is raise your interest rate and minimum payment to a level that may make it impossible to repay on a timely basis without also meeting basic living costs. This is where debt management becomes important.
The most commonly recommended form of debt management is what is known as a debt management plan. Basically, debt management plan is a structured repayment plan created by the debtor in conjunction with a third-party. The idea is to work with creditors to negotiate a deal wherein the debtor can successfully make timely payments based on what they can actually afford to pay, rather than what the creditors would like them to pay. Enrolling in a debt management plan is very easy and usually low-cost, which is why they are a very popular method of debt relief.
How Debt Management works
Once you have decided to seek help with your debt, the first step is to meet with a debt management service. These services exist to help debtors eliminate their debt by creating individualized repayment strategies. A debt management program is generated by collecting information about the debtor and the creditors. They typically follow a few steps.
The first step is compiling information about the debt itself. A debt management professional will review the debtor’s financial obligations, such as the amount owed and the interest rates set by each creditor. The second step is to obtain information about the debtor’s monthly income and living costs. By contrasting the two lists, the debt management counselor can ascertain exactly how much the debtor can afford to pay each month without falling behind.
The final step is to negotiate with the creditors to find a repayment schedule that is acceptable to both parties. Once these steps have been completed, a debt management plan is created for the debtor. By enrolling in a debt management plan, the debtor agrees to deposit an agreed-upon amount with the third-party service, which will then disperse the money to appropriate creditors.
Keep in mind that this is not a magic solution to your debt problems. Debt management plans can take years to complete and will require that you stick to the budget the counselor has made for you. However, once you have successfully completed a debt management plan, you will have the satisfaction of knowing that you took control of your situation and eliminated your debt the only way there is: by paying it back.
Do you need Debt Management services?
Not everyone is eligible for debt management services. Financial experts recommend using them only as a last resort to avoid filing for bankruptcy. If you have less than $10,000 in credit card debt and can still pay a little more than the minimum to your creditors each month, you are better off formulating your own debt management plan. This is because by seeking debt management services, it may be necessary to negotiate debt settlement plans with your creditors, which will lower your credit score. You should avoid this if possible.
Be honest with yourself about your financial troubles. If you find them to be unmanageable, make an appointment for a consultation with a debt management company. Though it can be embarrassing asking for help, a good debt management counselor will be able to tell you what the best solution is for your particular situation.
How to find debt management services
There are hundreds of debt management services currently operating in the United States. It can be difficult to parse through the listings if you don’t know what to look for. There has been a large increase in dishonest debt management organizations which exist only to take money from their customers, rather than distributing it to their creditors. Signing up with an unscrupulous debt management service can leave you in a worse financial situation than you were originally. Such unethical firms are easy to avoid with the right information.
There are both for-profit and non-profit debt management services. Though both will require a fee for enrollment, non-profit firms usually do not require monthly fees or the signing of a contract. They are a better option for individuals who cannot afford to pay professionals large sums of money to organize their finances. Even so, no debt management service should charge exorbitant fees. They are there to help you, not to become one of your creditors! A good rule of thumb to follow is that a reputable debt management service should only charge an enrollment fee of $50 to $150. Anything more than that could be suspect.
To find a reputable debt management service in your area, your best option is to check national databases that have lists of certified firms. The National Foundation for Credit Counseling is the oldest organization of its type in the United States and offers a search tool on their website for debtors looking for local certified credit counselors. The American Association of Debt Management Organizations has a similar service. Both of these organizations have high business practice standard requirements for entry. By enrolling in an NFCC or AADMO certified debt management service, you can be sure that they are both well-regarded and ethical in their operations. Finally, you can also check with the Better Business Bureau should you have any doubts about the debt management organization your are considering. They will be able to tell you whether or not the organization is considered reputable.
Sources:
Find a credit counseling agency through the American Association of Debt Management Organizations
Find a Counselor through the National Foundation for Credit Counseling
Justice Department approved Credit Counseling Services
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