Many Americans have too much debt. They are overwhelmed and have a hard time making their payments.
Residents with large amounts of debt can benefit from financial assistance services that can help reduce debt. However, not every program is right for every financial situation. For instance, rather than moving forward with a debt settlement, residents can visit a credit counseling agency. Many non-profit organizations offer credit counseling services at low costs and even for free to help residents struggling with their debts. These counselors can also create budgets and financial plans to reduce debt effectively. One common strategy that credit counselors offer to clients as a solution is debt management plans. Using this method, counselors work with debtors’ creditors to establish a new payment plan and negotiate for lower interest rates. To learn more about debt management plans and how they may be able to help you, continue reading the sections below.
What are plans for managing debt?
A debt management plan is one solution for debt relief that is created by a certified credit counselor. These plans assistance residents in paying off their debts. Credit counselors work with debtors and creditors to negotiate a new, manageable payment plan. Under this plan, debts are consolidated so that clients only have to make one monthly payment instead of several. Additionally, clients often have lower interest rates with their new payment plans. As a result, residents can afford their payments.
After creditors and debtors agree on a plan, debtors can begin making their payments. However, these payments are now made to the credit counseling agency who then pays the creditors. Clients are often under this plan for three to five years. However, medical bills and student loans are examples of debts that are not eligible for a debt management plan.
Moreover, debt management plans are offered by non-profit credit counseling agencies rather than for-profit organizations. These agencies are accredited by the National Foundation for Credit Counseling so that clients can ensure their legitimacy. Clients can obtain many services for free or at low costs from credit counseling agencies. Initial consultations are typically free of charge, but they may be required to pay a monthly maintenance fee that is no more than $50 per month. Clients with financial hardships may be able to get their fees waves or decreased.
Debt Management Plan Considerations
There are many different debt management plans that you can take advantage of. However, some of these plans come with different risks and may not be beneficial to everyone. Before you decide on a debt management plan (DMP), make sure you take various factors into consideration. Otherwise, you may end up being in more financial trouble than before. While this may seem like an isolating task, you are not alone. In fact, you can rely on credit counselors to help you navigate this tricky financial situation. If you are concerned about your financial health, consider speaking with one of these workers to figure out which plan is best for you.
One of the major benefits of using one of these credit counselors is that they can help you find a debt management plan that is best for you. These representatives can work with as middle men and negotiate low interest rates with the creditors you owe. Usually, the rates can be at least cut in half. As a result, your monthly payments are lower and simpler to manage. Debt management solutions can also consolidate your debt. This means that you are only responsible for paying one monthly payment to the credit card agency instead of several different ones.
For some people, these plans can be very helpful. For others, though, some of the drawbacks can be costly. Some of the downsides to using a DMP include the following:
- DMPs may only work for certain types of debt.
- You may not be able to open new credit lines when you are using a DMP.
- You are tied to a strict payment schedule to pay off your debt.
Who should consider a debt management plan?
Certain residents are ideal candidates for debt management plans. Those with consumer debts from credits who struggle to make their monthly payments may be perfect for this method of debt management. However, residents who have very large amounts of debts that cannot be repaid within five years may not be eligible for a debt management plan. Likewise, residents with a small amount of debt who do not need assistance from a credit counseling agency may not benefit from such a plan.
The best way to ensure that a debt management plan is the most appropriate option is to consult with a non-profit credit counseling agency. This is because credit counselors are able to offer professional advice about finances and effectively examine a client’s situation. Counselors typically recommend debt management plans for residents who:
- Owe debt that is between 15 and 49 percent of their yearly incomes.
- Do not need to open a new line of credit to repay their debts.
- Have a steady income and will be able to repay their debts within five years.
Debt Management Plan Alternatives
Debt management plans can be a very effective method for debt relief for many debtors. However, other options may be more helpful for others. That is because debt management plans are not able to address all kinds of financial issue and debts such as student loans. Debt management plans are also not ideal for medical bills or debt related to taxes. Furthermore, residents who have very large amounts of debt or very small amounts of manageable debt should not consider debt management plans because they may not even qualify for this option. The following are other debt relief strategies that residents could look into:
- Bankruptcy – Residents with debts that are more than 50 percent of their yearly incomes and who cannot pay them off within five years may want to consider filing for bankruptcy. This methods allows debtors to have a fresh financial start. However, it can heavily damage credit and participants cannot begin rebuilding until approximately six months after filing.
- Do-it-yourself debt management – Those with debt that is less than 15 percent of their yearly income should consider a DIY method such as a debt avalanche.
- Consolidate debt – This strategy helps residents reduce monthly debt payments and consolidate all debts into a single payment. However, debtors are required to take out another loan to pay off all of their debts.