If you’re in debt, you’ve probably considered many options for getting out of it. Debt management is one option that can help you get control of your debt and improve your financial situation.
As you begin to explore your options to get out of debt, you must understand entirely what you’re getting into. This means knowing everything before you sign on the dotted line and make any commitment.
Debt management aims to lower risk (debt) to improve your overall financial health. I’m excited to share with you more about debt management, including the potential benefits and drawbacks of making your own debt management plan.
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What Is Debt Management?
Debt management is the process of developing a plan to repay debtors. Debt management aims to help the debtor repay their debts promptly and efficiently. Often, debt management plans involve negotiating with creditors to lower interest rates, monthly payments, and late fees. In some cases, debt management plans can also involve the consolidation of multiple debts into one monthly payment.
Paid services typically charge a fee for their assistance in developing and implementing a debt management plan. However, many free resources are also available online and through credit counseling agencies.
When done correctly, debt management can help reduce overall debt levels, improve credit scores, and reduce stress.
How Does Debt Management Work?
Debt management is the process of creating a repayment plan that fits your budget and negotiating with your creditors to lower interest rates and monthly payments.
This usually requires the assistance of a credit counseling agency.
The first step is to make a budget and calculate how much you can afford to pay each month.
Then, you will work with a credit counselor to develop a repayment plan and contact your creditors to request lower interest rates and monthly payments.
Creditors are not required to agree to your request, but many will be willing to work with you if they believe you are serious about repaying your debt.
If you stick to your repayment plan, you will gradually pay off your debt. I share my own experience dealing with debt collectors in another article. Feel free to check it out for some more tips: How To Deal With Debt Collectors | 4 Useful Tips And Our Story
What Are the Benefits of a Debt Management Plan?
Let’s go over the potential benefits of a debt management plan:
1. You could save money on interest and fees.
If you can negotiate lower interest rates with your creditors, you could save significant money on interest and fees over time. This could help you get out of debt faster.
Let’s talk a little about the interest rates you’re currently paying. Credit card companies typically charge high-interest rates, making it difficult to get out of debt. The average credit card interest rate is about 17%.
You could save significant money over time if you can negotiate a lower interest rate, even by just a few percentage points. This could help you get out of debt more quickly.
On the topic of fees, late fees and over-the-limit fees can add up quickly and make it even more challenging to get out of debt.
However, if you can negotiate to waive these fees, it could save you a significant amount of money.
2. You might improve your credit score.
As everyone knows, your credit score is essential. It’s used to determine whether you’re eligible for a loan and what interest rate you’ll pay on that loan.
Did you know that some employers check credit scores when considering job candidates? A low credit score could even prevent you from getting a job.
Fortunately, a debt management plan could help you improve your credit score.
Your payment history is the most important factor in your credit score. If you’re able to make all of your payments on time, it will have a positive impact on your credit score.
In addition, your credit utilization ratio (the amount of debt you’re carrying compared to your credit limit) is also a factor in your credit score. So, lowering your credit utilization ratio by paying off debt will also help improve your credit score.
3. You only have to make one payment per month
Anything that can simplify something as important (and challenging) as managing your finances is good, right?
A debt management plan can help to simplify things by consolidating all of your debts into one monthly payment.
Rather than having to keep track of multiple due dates and payments each month, you’ll only have to make one payment. This can help to make things a lot less confusing and stressful.
4. It can help to reduce or eliminate collection calls
If you’re behind on your payments, you’ve probably been getting a lot of calls from debt collectors. These calls can be very stressful and make concentrating on other things difficult.
Fortunately, a debt management plan can help to reduce or eliminate these collection calls.
Once you enroll in a debt management plan, your creditors will know you’re trying to repay your debt. As a result, they may be willing to work with you to stop the collection calls.
In some cases, your creditors may even agree to stop all interest and late fees so that you can focus on repaying your debt.
5. You’ll have someone to help you stay on track
It can be difficult to stay on track when trying to get out of debt. There will be times when you feel like you can’t make any progress.
A debt management plan can help to provide you with the support and motivation you need to stay on track.
You’ll have a debt management counselor to help you create a budget and stick to it. This can be a huge help when trying to get out of debt.
What Are the Disadvantages of a Debt Management Plan?
As you can imagine, you should know the disadvantages of a debt management plan. Here are some of the potential drawbacks:
1. It will take longer to pay off your debt
If you’re only making the minimum payments on your debts, a debt management plan will likely lengthen the time it will take to pay off your debt.
Your monthly payments will be lower under a debt management plan. It will take longer to pay off your debt in full.
The longer it takes to pay off your debt, the more interest you will pay.
So, a debt management plan is probably not the best solution if you’re looking for a quick fix to your debt problems.
2. You might have to close some of your credit cards
To enroll in a debt management plan, you will likely have to close some of your credit cards.
This is because creditors are often unwilling to work with consumers with open lines of credit. They view this as risky because you could rack up more debt while enrolled in the debt management plan.
If you cannot close all of your credit cards, you might still be able to enroll in a debt management plan.
However, you might have to agree not to use your credit cards while enrolled in the debt management plan. This could make it difficult to make purchases or handle unexpected expenses.
3. It could damage your credit score
Another potential disadvantage of a debt management plan is that it could damage your credit score.
The problem is that a debt management plan will appear on your credit report as a “debt management plan.”
This could make it difficult to get approved for new lines of credit.
So, if you’re planning on taking out a loan or applying for a new credit card soon, a debt management plan might not be the best option.
4. You might have to pay set-up fees
Some debt management companies charge set-up fees. These fees can range from a few hundred to a few thousand dollars.
Before you enroll in a debt management plan, be sure to ask about any set-up fees. You don’t want to be surprised by these fees later on.
5. You may have to give up some assets
You might sometimes have to give up some assets to enroll in a debt management plan.
For example, you might have to agree to give up your car if you’re behind on your car payments.
Or, you might have to agree to a deed instead of foreclosure if you’re behind on your mortgage payments.
For this reason, it’s important to speak with a financial advisor or bankruptcy attorney before enrolling in a debt management plan. They can help you understand what assets you might have to give up.
Debt Consolidation vs. Debt Settlement vs. Debt Management?
How do you know which one is right for you?
Here’s a quick overview:
Debt Settlement: With debt settlement, you negotiate with your creditors to settle your debts for less than what you owe. This can be a good option if you cannot make your regular debt payments and you’re struggling with high-interest rates.
However, it’s important to note that debt settlement can damage your credit score.
And, in some cases, you might have to pay taxes on the amount of debt that’s been forgiven.
Debt Management: A debt management plan is a repayment plan you negotiate with your creditors. Under a debt management plan, you make monthly payments to a debt management company.
The debt management company then uses that money to pay off your creditors.
This can be a good option if you struggle to make regular debt payments.
You must know that a debt management plan will hurt your credit score.
And you might have to close some of your credit cards to enroll in a debt management plan.
How to tell which is best for you?
That’s only a question that you can answer.
You’ll need to consider your financial situation and your goals. Then, you can decide which option is best for you.
If you’re unsure which option is best for you, we suggest you speak with a financial advisor or bankruptcy attorney. They can help you understand your options and make the best decision.
Is Debt Management Plan a Good Idea?
The truth is, it depends on your situation and level of financial self-control.
A debt management plan might be a good option if you’re struggling to make your regular debt payments.
It can help you get your debts under control and make it easier to make your monthly payments.
However, it’s important to remember that a debt management plan is not a magic fix.
It’s still up to you to make your payments on time and stick to your budget. If you cannot do that, your debt problems will likely continue.
Debt is something that you must take seriously.
If you’re unsure whether a debt management plan is right, talk to a financial advisor or credit counselor. They can help you explore your options and develop the best plan for your situation.
We hope the information in this article provides valuable insights to every reader but we, the Biesingers, are not financial advisors. When making your personal finance decisions, research multiple sources and/or receive advice from a licensed professional. As always, we wish you the best in your pursuit of financial independence!