Debt management is an important tool available to individuals who have found themselves in over their heads with financial obligations. Oftentimes creating a debt management plan is the only way in which to climb out of the financial hole incurred by excessive amounts of debt without creating even more debt along the way.
The financial definition of debt management is using a third-party agency to help debtor create a structured repayment plan that makes sense for their individual budget. Although a debt management plan can be designed by the individual debtor, most people find it helpful to employ the help of professional credit counselors and other professionals who can assist them in creating a sensible repayment schedule.
Basically, debt management works by helping you to pay down your debt while still being able to meet basic living costs. A debt management plan is created by totaling the amount owed, calculating monthly income and the cost of living, and working with creditors to generate a repayment schedule that matches the individual’s ability to pay.
How It Works
The purpose of creating a debt management plan is simple: to get your finances under control. In order to do this, you must first understand exactly what your financial outlook is and why it has become so untenable. Working with a professional debt manager or credit counselor will help you assess your situation and create practical goals for the future. Creating a debt management plan generally follows a series of steps.
The first step is to create a list of all the creditors currently owed money by the debtor, along with the dollar amount owed to each. There are certain kinds of debt which cannot be included in a debt management plan, such as secured debt. Car loans and home loans, for example, cannot be considered part of a debt management plan and must be factored in as a separate obligations in the second step.
Once a list of creditors and the amounts owed to them been totaled, the second step is to compile an accompanying list containing information about the debtor, such as their monthly income and expenditures. Rent payments, living expenses, car payments, and any other necessary monetary outlays are calculated in order to ascertain exactly how much money the debtor can reasonably afford to pay their creditors each month without falling behind on their living costs.
The third step is to contact the creditors and work out a payment plan that works for the individual debtor. This is where a debt management professional can be of invaluable assistant. As a rule, creditors would much rather receive regular payments of a smaller amount than chase up debtors for larger amounts that they cannot possibly pay. A professional credit counselor will have experience negotiating with creditors and may have better luck striking a deal that works for both parties. Though this negotiating can have a negative impact on your credit score in the present, it is better to show willingness to repay rather than letting the debt go unpaid – which can have an even longer-lasting impact on your credit.
Using the information culled from the lists created in the first and second steps, along with information from the creditors, the credit counselor can create the best possible repayment plan for the debtor. The idea is to pay back the debt in the amount and time-frame that is best suited for the individual.
Making the choice to Use Debt Management
Once you have decided to take control of your debt, seeking help from a debt management professional is a great option. The typical customer for debt management professionals is an individual who currently carried over $10,000 in debt and has already suffered damage to their credit score. Most professionals will charge a start-up fee of $50-$100, but should not ask you to sign a contract or continuing paying them for their services. The idea is to help you become debt-free, not saddled with even more financial worries!
As with all services, it is important to weigh the pros and cons of debt management before choosing a third-party to assist you. This is why debt management is usually reserved for individuals who are already suffering massive financial strife, rather than those who have smaller amounts of debt.
The most positive aspect of creating a debt management plan is an increased feeling of control over a previously unmanageable financial situation. The best debt management programs take all factors into consideration when creating a repayment plan, including smaller details that the individual might miss. In addition, the debt management professional will take over dealings with the creditors and act as an advocate for you in all correspondence.
One of the major downsides to using a debt management plan is that your credit score will be negatively effected. This is due to the fact that a large part of creating a debt management plan is negotiating with your creditors to either lower the sum payment or freeze interest rates. Doing so essentially breaks your original contract with the creditor and does not reflect well on your ability to pay your debts. However, as most people who seek debt management plans already have poor credit scores, this should not be seen as a reason to avoid debt management professionals. In fact, many creditors will look favorably on individuals who have created and completed debt management plans as it demonstrates responsibility.
When choosing a debt management agency, make sure the company is reputable and not in the business of lining their own pockets with your monthly payments. If in doubt, call your creditors yourself to find out whether or not payments are being made directly to them.
Remember that it takes much longer to become financially solvent than it does to become insolvent. It may not have taken you a long time to rack up the debt, but it will take years to pay it all off. However, at the end of it you will be a debt-free individual with a better idea of how to manage your money in the future and a credit score that can only go up.
Sources:
Debt Management on Debt Watchdog
The Truth About Debt Management
Managing Debt: Interview with the CCCS
