Helping you make sense of Debt Management, its Solutions. And Understanding Which Ones are Right for You and Your Family
What is Debt Management? Simply put, it is managing your debt. When debt gets to be unmanageable, people look for ways to manage it. When paying minimum monthly payments, debts keep building with interest.
When you go looking for help to deal with debt, the information can be overwhelming. You see options like Debt Management, Debt Reduction, or Debt Settlement. What do they mean? How do they differ?
Let’s sort through all this information and try to make sense of it.
One form of Managing Debt is Debt Settlement
Debt Settlement means you pay a lump sum to a creditor for removing part of the debt you owe. Example: You owe $20,000 to a creditor. You offer them $7,000 cash to erase your debt with them. If the creditor accepts your offer, they then write off $13,000 of your debt.
Debt Settlement can go one of two ways:
The creditor agrees to write off debt balance –
• Debtor offers a lump-sum payment to a creditor.
• Creditor agrees to write-off or forgives the remaining balance.
• To do this debtor stops minimum monthly payments.
• Late fees and interest add up.
• Debtor stops using the debt: credit card, loan, account.
• This damages the debtor’s credit score for up to 7 years.
• IRS considers forgiven debt as taxable income.
• Need to prove insolvency to avoid IRS taxes.
• Fees to settlement companies could wipe out any savings a debtor incurs.
Creditors don’t have to accept your offer. The creditor refuses the offer and will not write off the debt balance –
• Debtor offers a lump-sum payment to the creditor.
• To do this debtor stops minimum monthly payments.
• Late fees and interest add up.
• Debtor stops using the debt: credit card, loan, account.
• This damages the debtor’s credit score for up to 7 years.
• Creditor refuses the offer.
• Debtor gets sued by the creditor.
• At this point, late fees and interest add up to become relatively high.
• Wage garnishments are possible.
• Debtor owes Debt Settlement firm for trying to get the debt settled.
• File Chapter 7 Bankruptcy
Debt Management Programs or Plans
Debt management programs are also known as debt management plans. These are services offered by consumer credit counseling agencies. The debtor may not have to pay a fee, or it is low. Creditors help fund these agencies.
What credit counseling agencies offer:
• Help debtors set up their debt management program.
• Assess the debtor’s current financial situation.
• Provide advice on setting up a budget.
• Advise on managing the debtor’s money.
• Develop a realistic spending plan.
• Teach how to use credit responsibly.
• Provides debtors with a fresh start with their credit score.
• Help the debtor build a better financial future by establishing achievable financial goals.
What is in the debt management program?
• The agency negotiates a lower payment amount with each creditor.
• Lowers the total amount the debtor pays on all their debts each month.
• The agency negotiates lower or waived fees where possible.
• The agency negotiates reduced interest rates where possible.
• The debtor agrees to repay the total amount of debt over an agreed term.
Both the debtor and the creditor benefit from a debt management plan. A majority of people can pay off their debt in three to five years.
Reasons people choose a debt management plan to pay off their debt.
• Debts are combined into a monthly payment.
• Simplifies debtor’s finances.
• The debtor pays the agency, then the agency pays the creditors.
• Save money in lower interest rates and fees.
• New monthly payment may be less than the previous total paid.
• If payments are lower, then more money is available for emergency savings.
• No damage to the debtor’s credit.
• Helps debtor build or re-establish credit history.
• All debts are paid timely every month.
• Helps debtor make a fresh start with their credit history.
• Credit counseling agency supports the debtor through the process.
Other Debt Control Options
Debtors may want to consider debt consolidation. Debtors who qualify for a new loan may wish to use it to pay off all their current debts. They use loans from their bank or credit union to pay off debt. Or using a zero balance credit card transfer. This option may reduce their interest rate.
Debt consolidation companies, also called debt reduction companies, do this for the debtor for a fee.
• They help find the loan.
• They pay off the creditors for the debtor out of the loan funds.
• They pay themselves from the loan funds.
• Now, debtors have to pay interest on the agency’s fees.
• The term of the loan could be longer, meaning it costs the debtor more in interest.
• Companies who specialized in debt consolidation loans tack a fee on the front.
• This means you will be paying them interest on their fee.
Debt reduction strategy that debtors can do themselves using a debt snowball method.
1. Save an emergency fund of $1,000.
2. Pay as much as they can on their smallest debt until it is paid off.
3. Pay minimum payments on all other debts.
4. Take the money they paid toward the smallest debt and roll it into the payment for the next smallest debt. Thus, that debt gets paid off.
5. Pay minimum payments on all other debts.
6. Debts are paid off from smallest to largest.
7. The debtor pays off the next debt. They add the funds they now have from paying off the two previous debts to this debt’s minimum payment.
8. They continue paying the minimum on all other debts.
9. They follow this process until all debts are paid.
The debt snowball method works. The debtor is forced to focus on their debt and change the way they pay their bills. The debtor is forced to change the way they view their debts. In this way, their behavior changes toward debt.
Debtors have several options for paying off their debt. Some have risks involved. Some involve paying fees to companies that specialize in debt assistance. And some the debtor can do themselves.
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