It doesn’t take an economist to see that the American economy has seen far better days. Jobs are being lost with unsurpassed frequency, leaving many financially marooned. Compound that atop many Americans’ reckless spending and the reasons for their debt become immediately apparent. That debt isn’t going anywhere without action—it needs to be dealt with immediately. For some, the best option is a debt management plan.
What is a debt management plan?
Essentially, it’s a formal agreement between a debtor and the creditor(s) that are collecting their debt. Debt management plans are a form of debt consolidation that allows the debtor to consolidate their various debts into one monthly payment. The debt is paid over a fixed amount of time, and they’re meant to help debtors rid themselves of their debt so that they may properly control their finances. Through a series of monthly payments, portions of the debt are paid to a credit counseling agency, who will then distribute the funds to the creditors. In most cases, certain benefits like reduced interest charges and monthly payments may be granted after three (3) consecutive scheduled payments.
Debt management plans are a relatively quick way to pay off debt—they typically take 36-60 months to complete, and they are one of the safest and most logical ways of doing so. Simply entering into one such plan is the first essential step for many to take control of their financial debt.
What types of plans are out there?
Debt management plans can sometimes be tweaked to suit the needs of the debtor, but generally the plans are differentiated by the type of debt. There are plans for those with secured debt (I.e., debt that is attached to physical collateral like a home or a car), and plans for those with unsecured debt like student loans and overdue credit card and medical bills. Many agencies don’t have plans for individuals with secured debt—they’re usually meant for people with unsecured debt.
Who needs a debt management plan?
The first step in determining whether or not a debt management plan is right for you is to determine the amount of debt you have. They are usually meant for individuals with severe debt, but the individual agency that is providing your plan will determine the parameters.
The type of debt you have is also an important factor in deciding whether or not you should enter a DMP. These plans are generally intended for those with unsecured debt, because secured loans are backed by collateral. The debtor’s monthly budget and amount of secured debt also factor into the decision of whether or not a debt management plan is the right course of action for that particular case.
Debt to credit card agencies, personal loans, retail store credit cards, medical bills and unpaid collection fees are all eligible for these plans. Additionally, if you have taken out new loans to pay for previously existing debts, are consistently late on paying the balance on one or more of your bills and are unable to manage multiple bills at once, or are dependent on cash advances on payday, then you could most likely benefit from a debt management plan.
What are the benefits of enrolling in a debt management plan?
If you’ve been getting those loathsome collection calls, signing up for a plan will certainly lessen them, if not completely eliminate them. Establishing a positive payment history is a good sign to creditors, and that will bode well for you in the future. Additionally, a DMP will afford you a less negative impact on your credit than a settlement would. The fact that some creditors do not participate in debt management plans is indeed a problem for some. However, if the option is available to you and the plan suits your needs, a DMP can help eliminate your debt and get you on the road to financial security.
- Debts can be kept from becoming delinquent, which could only lead to more trouble
- Monthly payments can be lowered
- Depending on the creditor, interest rates can be reduced.
- You’ll get ongoing advice about your finances so that you can learn how to effectively control your spending and stay out of debt for good.
It should be noted that the only thing that can truly keep oneself out of debt for good is financial responsibility. Improved spending decisions and better financial management skills are essential to staying debt free. However, a debt management plan may be a viable option to help maintain financial stability.