Wondering what is Debt Management? We got you!
From Student loans to overwhelming credit card loans, paying off debt can be an enormous struggle for many people.
Debt management can help you get yourself out of your debt sooner than you thought and rebuild your credit.
However, before you commit, you must understand how debt management works.
In this guide, we’ll be talking about everything you need to know about debt management and how it can affect your finances.
Key Takeaways
- A DMP plan can help you in avoiding bankruptcy.
- DMP’s are meant for priority debts like credit card debt and does not cover student loans, medical bills, mortgages, or car loans.
- You can either hire a credit counseling agency or choose the DIY approach to create a debt management plan.
- DMP can help you in paying your debts faster with a lower interest rate.
What Is Debt Management Plan?
A debt management plan is an informal agreement between you and your creditors to pay back your non-priority debts by one single monthly payment, which will be divided between your creditors1.
A debt management plan is a great way to avoid bankruptcy and decrease your existing debt and move forward to eliminate it without inflicting severe damage to credit scores.
Debt management plans typically cover priority debts like credit card debts and won’t help with other forms of debt such as student loans, medical bills, mortgages, or car loans.
How Does Debt Management Works?
You can either do it yourself or hire a credit counseling agency to help you create debt management to pay unsecured debt through financial planning and budgeting.
- DIY Debt Management
In a DIY plan, you will create a plan that fits your financial situation and specific budget to pay off your debts while maintaining your financial stability.
The Debt Avalanche or Debt Snowball method is the best DIY version of debt management.
- Debt Management through Credit Counselor
If you opt to do debt management through credit counseling, you’ll have to contact a credit counselor in your area who will review your financial situation and the debts you owe, and help you create a plan to repay your debt.
Once you agree with the plan, the counselor will contact your lenders to negotiate the terms, such as lowering your interest rates or monthly payments, waiving fees, or reducing the amount you owe.
Once your credit card issuers agree to the plan, you’ll make a single payment to the credit counseling agency, which will then distribute the money to all your creditors.
Read: 10 Best Debt Relief Companies Of 2022
Should You Choose Debt Management?
A debt management plan is a powerful tool for regaining control of your finances. Following are the circumstances under which you should choose debt management:
- You have heavy credit card debt.
- You have a poor credit score to qualify for a personal loan or a balance transfer credit card.
- You have debt that you can’t pay from your funds or debt consolidation
- You need an effective plan to avoid more debt from adding to your account.
Pros & Cons
Here are some pros and cons that you should consider before taking a leap:
Pros
- The primary benefits of the Dept management plan are the faster payoff time and lower interest rate.
- You only need to make one monthly payment to your credit counseling agency, typically much less than what you pay on your combined debts.
- DMP will stop any ongoing collection attempts from the collection agencies, such as phone calls and letters.
- Have little or no impact on your credit scores than debt settlement or bankruptcy.
Cons
- A debt management plan generally won’t cover secured debts and a few unsecured loans such as student or car loans.
- You’ll be required to stop using any credit cards, not a part of the debt management plan to diminish your access to the credit.
- You’ll be charged an initial fee and then a monthly fee to participate in the Dept management plan.
Amit Gupta is the founder of National Planning Cycles, a company that helps startups, individuals, and small businesses with their financial planning. He has a vast amount of experience in the finance sector, having managed Google Play accounts for some of the world’s most successful unicorns. Amit is an expert in his field, and he uses his knowledge to help others achieve their individual goals.
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