If you’re in financial trouble due to excessive debt you already know that you need help, but you may not have any idea how to go about getting it. Fortunately there are many professional organizations who are willing to work with you to regain control of your finances using various repayment strategies. However, knowing whether or not debt management is the right choice for you can be difficult to figure out without the right information. For example, you might not be eligible for debt management plans depending on your current debt to income ratio or you may simply not like the options that are available to you.
To make an informed decision, study the facts and meet with a qualified credit counselor to get a clearer picture of your financial options. Consultations should be in-person and low-cost if not free. Your ultimate goal should be to create a realistic repayment plan based on your budget. Getting debt management help is the first step on your way to financial solvency.
What is Debt Management?
Debt management encompasses many different repayment strategies. The most common are debt management plans and debt consolidation.
Debt Management Plan
A debt management plan is a structured repayment plan created by the debtor in conjunction with a third-party debt management professional. The creation of such a plan generally encompasses a few steps.
The first step takes into account the amount of debt owed, the parties to whom it is owed, and the interest rates on each. The second step involves the debtor’s monthly income, living costs, and secured debts (such as car and home loan payments). Once the information has been compiled, the credit counselor negotiates with creditors to offer the debtor lower interest rates, debt settlements, or other financial incentives to assist in repayment. After a deal has been reached, a written debt management plan that includes repayment schedule, total amount, and long-term goals are delivered. The debtor then deposits a monthly sum in an account which is then dispersed to the appropriate creditors by the debt management company.
The counselor may also offer monthly money management skills to help the debtor stick to a budget that will help them pay down and eventually eliminate their debt.
Debt Consolidation
Debt consolidation involves using a loan from a single lender to pay off a number of creditors. The debtor will then make a single payment to the lender, usually a bank or different credit card company. If you can find a low-interest loan, debt consolidation is a good option. However for people with damaged credit, it may be difficult to get such a loan without putting up collateral – such as their home – as a financial guarantee. The danger with debt consolidation is that many individuals continue to use credit while repaying the single lender. This creates even more debt and makes it impossible to shift the debt further later on down the line. In the worst case scenario, the individual defaults on their loan and their property goes into foreclosure.
Is Debt Management Right For You?
Coming to the realization that you need help with your finances isn’t easy. It can even be embarrassing to admit that you have lost control. However avoiding bills and collection calls will only do more damage to your credit in the long run, so it is far better to face your debt head-on rather than let it grow to insurmountable proportions. This is where debt management comes into play.
Many people have found debt management to be incredibly helpful, but this may not be the case across the board. There are many different types of financial trouble. Depending upon which bracket you are in, your options may be limited. Generally, if you can afford to keep up with your minimum payments and possibly pay more than the minimum without over-stretching your budget, you are better off trying to pay down your debts on your own. This is because participating in a debt management program will lower your credit score as it effectively breaks the contract you made with your creditor when you signed up for the loan in the first place. If you can continue paying your debts without involving a third-party, it is almost always the best option.
With that in mind, people who need help with debt management typically cannot continue to make their minimum payments and afford to pay their living costs, which is why they seek assistance in the first place. If you have already suffered damage to your credit score, debt management may be your only option other than bankruptcy which will have an immediately negative, long-term effect on your credit score. A general rule of thumb is that anyone with over $10,000 in debt is a candidate for debt management.
In order to decide whether or not debt management is the right option for you, take a good look at your debt in comparison to your income. You can also meet with a certified credit counselor who will review your finances and recommend a solution based on their knowledge and experience. Debt management isn’t always the answer. A credit counselor can assist you in finding your personal best road out of debt.
Where to find Debt Management Organizations
You can find reputable debt management organizations by searching a number of the databases. National accrediting bodies such as the National Foundation for Credit Counseling and the American Association of Debt Management Organizations have strict ethics rules and only admit service providers that meet their high standards. The Better Business Bureau can also be of assistance when looking for a well-regarded debt management organization.
Sources:
Pros and Cons of Debt Management
Debt Management 101
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
