Individuals who are struggling with a substantial amount of debt can find relief in the form of a debt management plan. A debt management plan is a repayment strategy devised by the individual in conjunction with a credit counseling service. The goal of a successful debt management plan to pay down debts in a way that makes sense for both the creditors and the individual’s budget.
Basically, a debt management plan is a voluntary arrangement made with your creditors to pay back the money owed without going further into debt through raised interest rates, late fees and other punishments. Creating such an arrangement involves being honest with yourself and your creditors about your budget, as well as the amount of debt your are actually carrying. It also involves working closely with a qualified credit counselor in order to track your spending and organize your repayment plans.
After signing up to a debt management plan, you will make a single payment to a credit counseling agency, which will then disperse the money to your creditors. Though you must still be vigilant about who you choose to handle your money, a debt management plan is a relatively simple and honorable way to systematically lower your debt in a way that is tailored for your financial situation.
Why choose a Debt Management Plan?
There are several reasons to choose a debt management plan over other methods of debt repayment. Debt management plans are recommended by both financial experts and the FTC as an excellent way to both repay your debt and repair a damaged credit scores if you lack the knowledge to do it on your own.
The most common reason debtors chose debt management plans is that they simply do not have the time or financial knowledge to create a realistic budget for themselves. In addition, individuals who are in debt to several creditors find it easier to make a single payment to a debt management agency with the knowledge that they will allocate the money to appropriate sources.
There are other benefits to signing up for a debt management plan. The most important is the opportunity to work with qualified credit counselors who can teach you money management skills while they assist you in formulating a sensible repayment plan. Credit counselors have a broad range of financial knowledge that is a great resource for debtors, as well as practical experience negotiating settlement plans with creditors (a major part of debt management plans).
How to Create a Debt Management Plan
The aim of a debt management plan is very simple: to regain control of your finances without neglecting basic living costs. Many people end up filing for bankruptcy because they can no longer afford to pay both their creditors and their living expenses. With a solid debt management plan, there is no reason why this should happen.
Creating a debt management plan generally entails 3 steps. These steps are usually completed with the assistance of a credit counselor.
The first is to compile a list of creditors and total the amount owed. This essential step will help you to assess exactly the amount you are obligated to pay. When money is owed to several different creditors with variable interest rates on each amount, the final figure can be difficult to figure out. However, in order to create a cohesive strategy for eradicating your debts it is vital that you understand the total sum you are expected to repay.
Keep in mind that some debts cannot be included in debt management programs. Secured debt, such as home and car loans, are not considered eligible as there are tangible assets involved. These debts must be factored into the second step of debt management plan creation.
The second step is is to figure out your monthly income and expenditures. This includes rent, food budget, car payments, and other living costs.
This second step is just as important as the first. It is of paramount important to be completely honest about what you earn and what you spend. Attempting to cut corners will only make it more difficult to generate realistic repayment plan. Before you can begin negotiating with your creditors, you must know exactly what you owe, what you earn, and what you are obligated to spend each month.
Once you have a clear picture of your current financial situation, it is time to start working with your creditors to find an arrangement that works for both parties. Do not be afraid to contact your creditors and admit that you are having financial difficulties. In general, creditors would prefer to receive smaller payment amounts for a longer period of time than be forced to sue debtors for larger sums they are in no position to pay. Creditors may agree to settle the debt for a lower sum than is currently owed or freeze interest rates to keep the debt from growing at too rapid a rate. While such agreements will impact your credit score in the present, consistently making payments on your debt is a sure-fire way to raise your credit score in the long run.
The final debt management plan is created using information culled from the above three steps. You will know exactly how much of your income will be going towards repayment, as well as the amount of money you are obligated to spend on living costs each month. You will also have the satisfaction of knowing that you are in control of your finances and have nothing to fear from creditors or debt collection agencies.
Be aware that many credit counseling agencies have bad reputations for enrolling customers in debt management programs and subsequently failing to make timely payments on their behalf or lining their own pockets with your monthly sum. Protect yourself by checking with the FTC and Better Business Bureau before enrolling in any debt agency program that sounds too good to be true.