Is Debt Management for Me?

While credit can be a great tool to help people advance their education or secure a home, it needs to be approached with care. Due to the ease with which credit is given, many find themselves on hard times due to unforeseen events or bad financial planning. If you are among the millions of Americans that are having trouble repaying their debt, then debt management might be the perfect solution for you.

Debt management is usually among the last resorts for people that are deep in debt and are trying to bounce back and regain financial health. While it might be great for avoiding the worst-case scenario of defaulting, hounding by collection agencies, declaring bankruptcy, it is not without drawbacks. Debt Management can still have adverse effects on a person’s credit score, though not as severe and long term as the alternatives.

However, before deciding if it is the right step for you, you need to understand what debt management is, how it works, as well as the pros and cons of this approach.

What is Debt Management?

When a person finds himself in debt, owing money to a creditor, he is usually unsure of the debt settlement steps to take to solve the problem. Many seek the advice of professionals during these financial hardships. These pros help by providing some form of debt management. Debt management is a reorganization of one’s lifestyle and expenses to repay debts as soon as possible. It usually involves a Debt Management Plan (DMP).

These plans take a lot of factors into account and are tailored to the specific situation of the debtor. They can involve talking with your creditors to lower the debt and creating long term plans to pay off the debt. It is important to note that DMPs are only an option for unsecured debt, such as personal loans, bank overdrafts, credit card debt, and other non-priority debts. Debt management cannot be included in secured debts like mortgages, rent, utilities, car payments, and others.

How the Process Goes

For those that are interested in a DMP, the first thing that you need to do is contact a DMP provider. The Federal Trade Commission advises debtors to never settle for DMPs unless the provider is reputable and has taken the time to go over and discuss your financial situation with you. It is essential to be aware since the market for such services is diverse, that some are only there to exploit vulnerable people. Take the time to research before committing to someone’s services.

Once you find a trustworthy DMP provider that understands your situation and offers financial counseling, you can work out a plan. The first part of the debt repayment process will involve carefully going over your finances. This can include taking account of income and expenses and then working out where you can reduce costs and redirect money to debts. Debt management companies will also reach out to the creditors to see if he can change any of the terms through debt management programs like debt consolidation loans or repayment plans. This can include negotiating a reduction in interest, monthly payments, or the overall amount that is owed. Once the counselor and creditors reach an agreement, the DMP that was set up can take effect, and you can start paying monthly deposits to the credit card counseling organization.

Important things to note

Once an agreement and a debt payment plan have been made between the parties involved, it is essential to stick to it and make the agreed-upon payments regularly. A missed payment void the entire agreement. Most counselors will also advise you to close any credit cards you currently have to avoid acquiring any additional debt during this period.

The goal is to settle your account as efficiently and quickly as possible. Some people settle their accounts for less than the initial amount owed, which can negatively affect credit scores. However, many prefer this option over the danger of declaring bankruptcy.

Pros of Debt Management

For those that have fallen on hard times and are having trouble handling the debt on their own, a debt management plan can provide debt relief and the following benefits.

  • Stop the harassment – Put an end to endless calls and messages that creditors send.
  • Provide some structure – Give you a game plan to follow, as well as a timeline that will let you know how and when your debt will be paid off.
  • Debt consolidation – They can help you consolidate multiple payments into one. This makes it easier to track and is less stressful than numerous monthly payments.
  • Possible reductions – They can negotiate lower interest rates, late fees, monthly fees, or even the principal amount owed.

Cons of Debt Management

While paying off your debt at a slower pace or at a lower interest rate is better than bankruptcy, it still carries some consequences. DMPs can have a negative effect on credit scores. Enrollment in a plan does not directly affect your credit score. However, the actions that your plan may require you to take can negatively affect it. Here are a few examples of how debt management can affect your credit score.

  • Pause on credit card usage– A counselor can ask you to stop using your credit cards. This can be very difficult for people that have gotten used to paying with credit cards. No matter how difficult it is to adjust to this rule, it is an important step in ensuring that the balance owed does not get larger.
  • The consequence of reduction – If you are successful in lowering monthly payments or even settling for less than the initial amount owed, your credit score might be marked for a settlement. However, the good news is that your debt will be settled in full.
  • Problems with late payments – Should you or the credit counseling agency not make a payment at the agreed-upon time, the missed or late payments will show up on the credit report.

DMPs and Credit Scores

As you can see, a debt management plan can negatively affect credit scores. They are usually noted on reports with notations. These notations will inform future lenders that a person was not able to pay out debts as initially agreed, but that they repaid a reduced amount. These notations will stop you from being able to acquire new credit. However, once they are removed, there will be no long term consequences to your credit score. Another good point to note is that FICO does not take these notations into account when determining FICO scores.

These things take time, and no quick fix can get the job done. A DMP is a long term solution to getting out of debt. However, in the short term, there will be a dip in your credit score due to the steps that you will have to take to prevent going further into debt. With the right partner by your side, the long process can be tackled a step at a time.

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