Updated: Nov 9, 2021
Debt Management Plans
Estimated read time: 6 minutes
It's not uncommon to be in debt, but the fact that many other people owe money doesn't provide much comfort if you're struggling to pay bills or cover your mortgage. If you're in debt, and you've reached a stage where you can't afford to pay creditors, you might feel like there's no way out. Being in debt can be incredibly distressing, but there are almost always solutions. One option that may be recommended by debt counselors or financial advisers is a debt management plan.
What exactly is a debt management plan?
A debt management plan is a system that involves working with a debt management firm, most commonly a credit counseling company, to manage debt effectively and enable you to pay back the money you owe. A debt management company will work with you to create a tailored plan, which gives you the option to pay a single sum each month to reduce your debt over a period of time. The management company or credit counseling firm will liaise with your creditors, the people you owe, to come up with a solution that compresses a series of payments into one monthly transaction. In many cases, representatives of the firm will be able to negotiate better rates and reduce interest fees, which will save you a substantial amount of money.
How does a debt management plan work?
If you're opting for a debt management plan, the debt management company will analyze your income and expenses to work out how much money you can afford to allocate to debt repayment every month. Once they have figures in mind, they can communicate with your creditors on your behalf and draw up a strategy that suits both parties. Once you have a plan, you'll know exactly how much you're paying out every month to lower the total amount of debt, and you should also enjoy peace of mind that you won't have people chasing you if you adhere to the terms of the agreement.
With a debt management plan, a number of different payments can be simplified and squeezed together to form one single payment. This makes it much easier to keep track of how much and who you owe, and it can also help you to manage your spending more effectively.
Finding a debt management plan
If you're in debt, you may be reticent to seek help. It's often difficult to front up to situations that are contributing to fear and anxiety, and some people feel embarrassed or ashamed that they can't cover bills or afford to pay off debts. If you are struggling, the best thing to do is seek advice as early as possible. There is help out there, and there are lots of avenues you can consider if you're looking for ways to clear debt and improve your financial situation.
There are several options open to you when it comes to finding a debt management plan. This is a service offered by all kinds of financial companies, as well as non-profit organizations. Some firms will charge a fee, which can be substantial, while others, most notably non-profit organizations, will provide products and advice free of charge or for a small fee. There may be a startup fee, as well as a monthly charge. When you're searching for a debt management plan, look for reputable companies that have excellent review scores and client testimonials.
The pros and cons of debt management plans
If you're on a mission to clear your debts, you may be presented with a range of options, and it's often hugely beneficial to be aware of the pros and cons of each product or service before you make a decision. It's also worth noting that you don't have to make this decision on your own. It's advisable to speak to a debt counselor or a financial adviser, as they will be able to make recommendations based on your individual situation and the amount and type of debt you have.
The pros:
- Lower interest rates: when you enter into a debt management plan, debt management or credit counseling firm will liaise with your creditors to reduce your debt and come up with a suitable time-frame for clearing your debt. They will often be able to negotiate better rates and lower interest fees to bring down the total value of debt. In some cases, it may be possible to lower the interest charge by up to 50%.
- Clear your debt faster: if you're paying off debts on your own, you may have a schedule in place, but you can almost always save time, stress, and money by working to a debt management plan. This option is a simpler process, which involves a single payment rather than several transactions per month, and you could also save a substantial amount by benefiting from preferential rates and lower interest fees.
- Straightforward payment process: if you're trying to clear debts, you may be paying several different organizations at different stages of the month, and it can be difficult to keep track. A debt management plan consolidates your debt into a single payment. With this service, you know exactly how much is going out of your account on which day, and you don't need to worry about remembering to make multiple payments.
The cons:
- Versatility: a debt management plan isn't a suitable option for everyone. In most cases, this kind of financial product is used to clear credit card debt. It may not be suitable for those who have college debts or medical bills to pay, for example.
- Limited credit: it takes most people at least 3 years to clear their debt using a debt management plan and during this time, lines of credit are likely to be closed to you.
- Missing payments: if you miss payments, this can halt your progress and prevent you from benefiting from lower interest rates and other perks going forward.
How do I know if a debt management plan is right for me?
A debt management plan can be incredibly beneficial for some people who are in debt, but it's not always the best option. Every client has unique needs, but typically, a debt management plan is recommended for those who have debts that amount to between 15 and 49% of their total annual income and a secure income source. To benefit from this plan of action, you need to ensure that you're able to cover the cost of your monthly payment without needing to apply for a loan or any additional credit. This option is suited to people who have a steady income and are confident that they can pay off their debt within a 5 year-period after counselors or advisers have negotiated preferential rates.
If you're unsure whether a debt management plan could be suitable for you, don't hesitate to seek advice. There are nonprofit organizations that offer debt advice and helplines, and some banks, independent advisers and financial institutes also offer free consultations. If you see an experienced adviser, they will be able to look at the figures and suggest courses of action to you.
What are the alternatives?
For some people, a debt management plan will be the best option on the table. If, however, this avenue isn't worth exploring, there are other solutions. If you have a small amount of debt, for example, less than 15% of your annual income, you could adopt a DIY approach and set up a payment scheme using a budget planner. You could consider methods like the snowball or avalanche techniques, which involve working through your debts from the smallest fee to the largest or vice-versa. If you have a good credit score, but you're struggling to pay off multiple debts, a debt consolidation loan could be an option worth considering. This involves taking out a loan to cover all your debts. Once you've done this, all you'll have left to pay is your loan repayment.
Tips for managing your debt effectively
- Avoid using your credit card: if you find it hard to resist getting your card out, give it to somebody you trust or take it out of your wallet and lock it in a drawer or cupboard
- Cut out unnecessary purchases: ask yourself if you really need every item before you add it to your cart. If your answer is no, put it back on the shelf.
- Pay back as much as you can afford
- Draw up a budget and update it as you go
- Don't beat yourself up: dealing with debt can be difficult enough without blaming yourself or putting yourself down
If you're in the process of paying off your debts using a debt management plan, here are some tips to help you stick to the plan and take control of your finances:
A debt management plan can provide an effective solution for many people who are trying to pay off their debt. Sticking to the plan will develop some invaluable habits that will help you stay out of debt from here on out. If you're in debt, you have multiple creditors, and you're struggling to make a dent in the total amount, a debt management plan could help you to reduce the value of your debt, simplify the payment process, and give you peace of mind that you know exactly what you have to do to become debt-free.