What is a Debt Management Plan?

JULY 15, 2022 – With debt in the United States at all-time highs, Americans are finding it increasingly difficult to extricate themselves. So what are some of the best ways to get out of debt and what is a debt management plan?

What is a Debt Management Plan?

A debt management plan can include a variety of different approaches designed to help you get your debt under control. Although there are a few strategies you can employ, the term mainly refers to two specific plans – debt consolidation and debt settlement.

While it can be difficult to figure out which of these strategies will work best for you, a basic understanding of these strategies can help you figure it all out. So what are these strategies and how do you know if they are right for you?

What is Debt Consolidation?

Debt consolidation is a type of debt management plan designed to help with unsecured debt. Unsecured debt is any type of debt that is not backed by collateraland while this mostly means credit card debt, there are other types that could be included in your plan.

These types of debt often have high interest rates because of the risk that the creditor is assuming. And that debt can quickly become a runaway train if the consumer happens to fall behind.

Debt consolidation works by paying off this unsecured debt and providing the consumer with a new loan at a reduced interest rate. This gives the consumer the opportunity to pay off the debt more slowly while reducing their overall burden over time.

How do I know if consolidation is right for me?

There are a number of factors to consider when looking at all the different debt management plans, and it’s important to consider them all before committing to any long-term deal. When it comes to consolidating, you want to be reasonably sure that you have a steady income and that you can pay off the debt over the course of about 5 years. Both the type of debt and the amount you have are also important.

This is because consolidation mostly applies to unsecured debt such as credit cards, medical debt, payday loans, store cards, or gas cards. It is also important to be aware of the fact that participating in a debt management program that involves consolidation often results in rejection by potential creditors while you are on the program. So keep this in mind as you anticipate opening new lines of credit.

What is Debt Settlement?

Debt settlement takes a very different form from consolidation and is considered a riskier form of debt management. This is due to the fact that while participating in this type of debt management plan, you stop paying your outstanding balances. Instead, the money you would have paid for those credits goes into a secured account with the company administering your program.

This account will grow over the course of about 2-4 years, and meanwhile your chosen company will start negotiating with your creditors. This allows them to use the amount you have accumulated in the account and gives you the option to pay off part of the original debt instead of the whole amount.

Depending on the company you use and the creditor you owe money to, this can result in large savings on your behalf. For further information on the topic, click here.

How do I know if debt settlement is right for me?

As with consolidation, there are a number of different factors to consider when considering a settlement. One of those factors will be the length of time you will be involved in the process. It can take anywhere from 2 to 4 years and you will need to make regular payments to build a healthy account worth using in negotiations.

You should also look into the company you will be working with to make sure they are reputable and working to the best of their ability to help consumers like you. Another consideration would be the possibility that your creditor could end up suing to collect their debt. Unlike consolidation, participating in a debt settlement program does not protect you from a lawsuit.

As debt settlement works toward that goal, creditors may grow impatient. But even if you are served or the company has informed you of its intention, you still have the opportunity to negotiate with the creditor before a judgment is reached.

How do I avoid getting into debt in the first place?

Sometimes going into debt can be unavoidable, such as in the event of a sudden medical expense or some other type of emergency. That’s why you should try to plan ahead for sudden events that can put you in a bad place.

So if you have a rainy day fund, you can get yourself out of trouble. Creating a budget and sticking to it can help you build savings for emergencies like these and give you a little wiggle room when dealing with any short-term debt you may need to accumulate.

It can be difficult to get a good feel for financial literacy, but when you look at good sources of information like these Consumer Financial Protection Agency can help you spot potential debt traps and guide you into healthy financial habits.

Stay up to date with the latest tips and take charge of your own debt management. Not only does this help take the burden of debt off you, but it can also give you a sense of control in your life that you may not have had before. And when you’re finally out of debt, you’ll be glad you asked, “What is a debt management plan?”