Debt Management Plan 2020
This year’s unique financial challenges call for creative solutions. When it comes to mounting debts, what you need is a debt management plan. These may provide a clear path to financial freedom.
If you are overwhelmed with high interest and have difficulty making timely payments, then it might be time to explore the advantages of debt relief options.
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What are Debt Relief Programs
Debt relief programs help you make payments you can actually afford while also reducing and eventually eliminating the debt owed. Debt relief options include credit counseling or a debt management program, debt consolidation, settlement, and bankruptcy.
The safest and most reliable option to control your spending habits is a debt management plan. This option involves the help of a credit counseling agency or credit counselor to create a payment plan within a realistic budget.
The next options carry more risk. A debt consolidation program typically involves a lump sum loan that clears the total balance of your debt from multiple creditors. The biggest advantage of debt consolidation is the significantly less stress of dealing with just a single creditor.
Next is debt settlement, which is done by a company on your behalf to settle a debt for less than what you actually owe. It comes with no guarantees as lenders are under no obligation to settle.
Debt settlement also damages your credit report for seven years. As such, it is less preferable than other solutions and should be approached with caution.
Lastly, declaring bankruptcy is the last and least desired debt management plan by debtors and creditors alike. Bankruptcy means you have declared yourself completely unable to pay your debts. It involves a bankruptcy court and may result in you losing assets to help pay your creditors.
While bankruptcy can offer a fresh start, this option has a dramatic effect on your credit report and affects your access to credit, insurance, job prospects, and even a place to live. Bankruptcy details like date of filing and the later date of discharge stains your report for ten years.
Debt Consolidation Programs
Having multiple loans that you cannot keep track of and pay on time can be a serious source of stress. If you have a good credit score and a steady source of income, then debt consolidation might be the best debt management plan for you.
The aim of debt consolidation is to remove high-interest debts and reduce them to a single monthly payment. Take note that only unsecured debts like credit card debt and personal loans are covered. Secured debts for cars and houses, as well as student loans, are not covered.
Debt consolidation can be in the form of a new loan that can clear the balances of your original loans. It can also be in the form of a debt consolidation program where you make a single monthly payment towards the credit counseling agency who will then disburse the payments to your various creditors.
The credit counseling agency works in cooperation with your creditors and will likely be able to seek concessions from them to reduce interest rates and monthly payments. They may also request “re-aging” your account to report it as current and avoid late fees, possibly improving your credit score.
What is Debt Consolidation
A debt consolidation loan and debt consolidation program work similarly. Both require you to make a single payment instead of multiple monthly payments. Either debt management plan will also likely result in lower monthly payments. However, it might take longer to clear your debt and you may end up paying more interest over the course of the repayment period.
You must do your research to ensure that a debt consolidation loan’s interest rate is lower than the average interest rate of your other debts combined. If not, then this debt management plan does not help you pay off your debt faster.
Credit card companies usually close your account once you are enrolled in a debt consolidation program. This requires you to live without a credit card during this period and avoid additional debt. Your creditors will see any new obligations in your credit report and may withdraw any concessions made.
How to Consolidate Debt
There are many nonprofit organizations that can provide a debt management plan for you. It is advisable to check with the National Foundation for Credit Counseling first and see certified counselors before committing to a consolidation plan.
A debt management plan with a nonprofit credit counseling agency will still involve enrollment and monthly fees. However, these usually come out lower as an overall cost. Moreover, since these agencies can usually arrange reduced interest rates for you, this means that you can become debt-free at a much faster pace.
A debt management plan usually lasts from 36 to 60 months.
Debt settlement as a debt management plan is much riskier than debt consolidation. Settlements can actually lower a borrower’s credit score by 65 or even 125 points. Some debt settlement companies often accumulate your money in their accounts and wait until it is large enough to make an offer to settle with your creditors.
This means your debts will remain unpaid for an uncertain period of time. A single missed or late payment can cause a negative credit mark. This mark will remain on your credit history for up to seven years.
Is Debt Settlement Really Worth It
There are many downsides to debt settlement. Some of these include the prevalence of fraudulent debt relief companies that prey on desperate debtors. Furthermore, beware of ads that claim no-risk debt settlement. These can involve filing for bankruptcy which, in a majority of cases, is not the best debt management plan.
Finally, protect yourself from any company that asks for upfront fees. Debt relief companies cannot accept payment until they can prove your settled debt. Otherwise, they are in violation of federal law and must be reported to authorities.