Most Americans will, at some point in their lives, get into some kind of serious debt. Fortunately, most of us will not suffer a huge hit to our lifestyles when we do, and even the ones that do will find a way to recover. However, this brings no comfort to the unlucky few who find themselves deep into debt due to ignorance or unforeseen circumstance. The number of seriously indebted Americans is also increasing further due to the ease of finding credit and the temptations of a consumption-driven lifestyle
Debt management aims to give you a cheaper way of getting out of debt than you would normally be able to. It usually involves combining several different outstanding bills into a single monthly payment, with the interest rates lowered so that they’re easier to pay off. In most cases, these debt management plans (sometimes referred to as DMPs) have payment schedules of 3-5 years. In most cases, they are negotiated with a creditor by a debt relief company or a credit counselor on behalf of a client.
Debt management is one of the most common strategies for tackling credit card debt. A debt relief expert will typically get in touch with all your creditors and try to get them to agree to a combined payment plan with the help of IVA (Individual Voluntary Arrangement). For the debtor, this means:
- No-fuss single monthly payments.
- Easier tracking – track one payment instead of several different payments.
- Lower cost compared to original terms.
- Collectors will be less likely to bother you.
- Demonstrating that you can make regular payments can improve your credit score over time.
While a debt management plan is a low-cost, simple way to pay off excessive debt in a relatively short amount of time, it does have some drawbacks. It can’t be used for tax arrears, or for medical or student loans. In the vast majority of cases, you will also be unable to use credit cards when you’re on a debt management plan. The terms for payment can also be pretty stringent, as missing one payment can result in penalties that put you deeper in the hole than you were in before. To sum up, the disadvantages of debt management are:
- The debtor cannot use credit cards for the 3-5 year duration of the plan.
- 3-5 years is too long for a lot of people to suffer a change in lifestyle.
- You cannot combine tax, medical, and student debt.
- You have to follow a strict payment schedule.
How is a debt management plan created?
First, you and your debt counselor will take into account your monthly income and expenses. Basic living costs such as housing, utilities, food, miscellaneous expenses and other loans that could not be included in the debt management plan are accounted for. Whatever is left is the amount you will pay on your new plan each month, to be divided among your creditors
Next, you will have to make a deposit to a specified account, normally managed by whoever negotiated your debt. They will then disburse the money according to the terms of your plan. The debt counselor or negotiator then may or may not get a fee from the money deposited in the account. You’ll have to make a deposit each month until the terms of the plan are met.
It’s important to note that there are predatory debt counselors out there that will charge an upfront fee, or other onerous fees even before they are able to deliver results. Get out of debt without paying unnecessary fees by getting in touch with any of a number of debt relief company that doesn’t charge fees unless they deliver something acceptable to you.