On the surface, a debt management plan is pretty much what it sounds like – a plan to manage your debt. But it can take several different forms depending on how you set it up and what your goals are.
Most people start looking into a debt management plan only after they are having trouble paying their credit card bills and other debts. If that’s the case you’re looking at, the main goal is to pay down your balances as quickly as possible to get the payments back under control.
DIY Debt Management Plan
There are many ways to accomplish a debt management on a do-it-yourself basis, but the most effective and easiest is probably called the Debt Snowball. We explain it in detail in this article on the NCES blog.
In a nutshell, you scrape together every extra penny you can and work on paying off the debt with the smallest total balance while still making minimum payments on everything else. Once that first debt is gone, you work on the next bill, throwing everything you were paying on that first one plus anything extra onto the debt with the second lowest balance. As time goes on, you are making bigger and bigger payments each month, paying down the balances faster and faster. Your payment “snowballs” allowing you to accelerate your debt payments, saving you lots of money on interest.
If you do not have any extra money to add to your minimum payments, you have some serious thinking to do. Can you sell some “stuff” to generate some extra cash? Maybe you can take a second job for a little while or freelance on the side. Can you scale back on your spending in some categories, like eating out or your tv streaming service? One way or another, you need to come up with some more cash each month if you want to get your debt under control.
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If you need some professional advice to pull together a debt management plan, you can contact a debt counselor. There are many reputable services out there. Most good ones are free and run by non-profit organizations. Some require a monthly membership to access their online tools and one-on-one counseling. Do your research and read all contracts carefully before agreeing to anything.
If the company you choose offers free debt counseling services, be on the lookout for the additional products and services they will offer you down the line. Unless they are supported by grants, they have to make their money somehow! Don’t buy something or sign up for a service just because they recommend it. Only make the purchase if you honestly believe that it will help you achieve your goal of paying off your debt.
Well trained debt counselors will be able to help you rearrange your budget to find the resources you need to start paying down your debts. They can teach you how to use different money management tools and help you evaluate your spending. In the end, you should have a workable plan for paying off the debts now and for saving money for the future.
Professional Debt Management
If you know you are not disciplined enough to stay on top of your own debt management plan or are so far under water that you can no longer even make minimum payments, it may be time to consider contacting a debt relief company. They will negotiate with your creditors to create a repayment plan you can afford. You may see portions of your balance written off, fees reversed, interest rates dropped, or the monthly minimum payment reduced.
Be aware, however, that all these write-offs and adjustments have a down side. Any “forgiven” amounts will be reported to the IRS as income on which you will have to pay taxes. Your credit score will also likely take a hit – but if you’re already behind on your bills, your score is already in jeopardy anyway.
There’s also a good chance you will make one payment each month by direct withdrawal to the debt consolidation company and they will be the ones actually paying your creditors. Yes, it’s convenient to just have one payment to make each month – but you do lose control over your payment. And if the money isn’t there when they try to draw it out, you’re in a whole new heap of trouble.
Whether you decide to do it yourself, to get help from a debt counselor, or to pull out the big guns with a professional debt management company, you should always complete at least one round of credit restoration with NCES first.
It only takes about 6 weeks to see if there are any errors on your report or collections that shouldn’t be there. After your credit report is cleaned up, you may have additional options for your debt management plan – like a debt consolidation loan or a low interest balance transfer credit card.
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If you have any questions, please give us a call at 770-952-5168 or contact us online.
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This information is intended for informational and educational purposes only and not as legal advice. If you have concerns about your credit report, harassment, identity theft, illegal collections activity, garnishments, or property liens, you should consult an attorney who specializes in consumer rights and defense.