Debt Management: Can you handle your debt?

Debt Management Solutions
Aly J. YaleMay 3, 2022
Key Takeaways:
  • No matter your situation, you can manage your debt.
  • Keeping your debts under control or debt management means monitoring your budget, spending, and savings.
  • There isn't one debt management plan. The best strategy can be a debt snowball plan, credit counseling, a debt management plan, or a debt settlement program.

Paying off debt is no easy feat — and often, it can feel like you’ll never come out on top. It is possible, though. With smart debt management strategies or, in some cases, professional debt help, you can pay off those balances — and possibly even sooner than you think.

Here’s what you need to know about debt management and how it can get your financial life back on track.

What is debt management?

At its broadest, debt management refers to keeping your debts under control — paying them on time, avoiding too-high balances, and eventually paying those balances off.

It can also refer to a specific type of debt relief called a debt management plan. Credit counselors use this type of debt payoff tool to help consumers pay off their debts within a specific time frame. We’ll go more into debt management programs later on.

5 debt management strategies that can help

The first step to managing your debts is to know the big picture: What do you owe, when is each debt due, and what interest rate are you paying on them?  

Start by making a spreadsheet of all your debts, so you can view them all at once. Include the creditor’s name, the current balance, the interest rate, the monthly payment, and the monthly due date for each. If it’s a loan with a set term, include that too. From there, you should:

Create a budget and determine what you can put toward your debts each month.

Smart budgeting is key to paying down debts. To begin, tally up your total monthly after-tax income. Then, list your monthly expenses, including rent, groceries, insurance, eating out, minimum debt payments, utilities, entertainment, etc. Next, separate the necessities and minimum debt payments from the nonessentials. 

Use past bank statements to determine how much you’re spending in each category. Financial experts generally recommend spending no more than 50% of your income on necessities, 30% on nonessentials, and 20% on your savings and debts. Do you fall within those thresholds? If not, look for ways to cut back. (You might even be able to eliminate an expense entirely by cutting cable or taking public transit, for example). If you can reduce expenses somewhere, commit to putting those extra dollars directly toward your debts. 

Ultimately, you should come out with a good idea of what you can spend on each expense and what you should have left over each month to put toward your debts. If your income increases or your expenses change, revisit your budget and recalibrate it. (You might want to do this every few months just to be safe anyway).

A quick tip: If you’re not a fan of manual budgeting, you can also use an app to help you stay on track. Mint, YNAB, Stash, and Personal Capital are just a few examples of budgeting apps that can help you manage your money and start paying down debt more effectively.

Determine the right payoff approach.

You’ll next need to determine which debts to prioritize. Consumers typically choose the snowball method, which focuses on your smallest debt first, or the avalanche method, which has you pay off your highest-rate debt first.

With the snowball method, you get small wins that keep you motivated, while the avalanche method saves the most cash. The right option depends on how much debt you have, your interest rates, and how motivated you are to pay down your debts. 

Keep in mind: You’ll need to keep making minimum payments on all your debts no matter which strategy you choose. You will put all your extra dollars toward either your highest-interest debt (avalanche) or smallest-balance loan (snowball). 

Set up autopayment or create payment reminders. 

Once you determine which debts to prioritize, set up autopayments with each of your creditors. Doing so will ensure that 1) you stick to your plan for repaying those debts and 2) you’re never late on a payment (which can hurt your credit score).

If you’re worried about not having enough cash in the bank to cover the autopayments, set up payment reminders instead. You can use Google Calendar or set an alarm on your phone for a certain date and time each month. Be sure to include the amount you’re sending each creditor to be safe.

Consider rearranging your debt.

You might also think about rearranging your debt to make it easier or more affordable to pay off. 

Rearranging your debt might look like:

  • Debt consolidation: Consolidating your debts is when you use a loan to pay off all your balances, essentially rolling them into a single one. Often, this will lower your interest costs and streamline repayment.
  • Debt refinancing: Refinancing is when you replace a debt with a new one — just with a different rate, terms, or both. It can often reduce your monthly payment and interest rate.
  • Balance transfer cards: With a balance transfer card, you can transfer all your credit card balances to a new one with zero interest. You’d want to pay off the balance before the 0% interest rate expires (usually in a year or two). 
  • Home equity products: If you’re a homeowner, you might use a home equity loan, HELOC, or cash-out refinance to pay off your debts. This strategy is often beneficial because mortgage products have lower interest rates than most loans and credit cards.

If you’re considering one of these strategies, you may want to consult a financial advisor first to ensure it’s the right move for your situation. 

Get professional help if you need it.

Finally, if you’re really struggling to pay off your debt, seek professional help — and don’t wait too long to do it. If you fall behind on payments or your accounts go into collections, it can be much more challenging to get back on track and pay them off. Reach out to a credit counselor or debt relief professional as soon as you feel you’ve lost control. 

What is a debt management plan?

Debt management plans, also called debt management programs, are offered through consumer credit counseling agencies. At their most basic, they help you streamline your debt payoff strategy and eliminate your debts within a specific window — usually two or three years, depending on how much debt you have.

Here’s a how debt management plan works: 

  • You agree to stop using your credit cards and credit lines and avoid opening any new accounts until your debt management program is complete.
  • Your credit counselor works with your creditors — your credit companies, lenders, etc. — to negotiate lower interest rates on your debts. Sometimes, the creditor may waive certain fees too. 
  • You pay your credit counselor a monthly fee. They use this to pay your various creditors until all your balances are paid up.

Fees for debt management plans vary. If you use a nonprofit credit counseling agency or have limited income, the services may be free. In other cases, you may owe a set-up fee and a small monthly fee while you’re on the DMP. 

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Frequently Asked Questions

What type of debt relief is out there?

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There are many kinds of debt relief to choose from. In addition to debt management plans, you can also look into refinancing, consolidation, or debt settlement, which is when you negotiate a payoff amount lower than your balance. You’ll do this by working directly with your creditor or using a debt settlement company. (A debt settlement company will keep a portion of the savings for their services).

Should I file for bankruptcy if I can’t pay my debts?

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Bankruptcy should be your last resort. If your debts are feeling out of control, get in touch with a credit counselor and discuss enrolling in a debt management program first. If that doesn’t work, you can explore other strategies, like debt consolidation, settlement, or refinancing.

Though bankruptcy can wipe many of your debts clean, it can seriously impact your financial options for many years to come (up to a decade). It could even make it hard to buy a house or secure a rental, so consider it only after you’ve exhausted all other options.

Who can I turn to for professional debt management help?

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You should first look to a credit counselor, as many offer free services. They can help you with budgeting, repairing your credit, and, if you wish, enrolling in a debt management plan. 

You can also talk to:

  • A financial advisor: They can look at your full financial picture and recommend strategies for paying down debt, investing, or just generally growing your wealth.

  • Your local bank or credit union: Someone at your main financial institution may be able to provide guidance. They can also help with refinancing or consolidating your debts in many cases.

  • A debt relief company: They can attempt to settle your debts, renegotiate your terms, or assist with consolidation, among other strategies. 

If your debts are feeling insurmountable, there are many professionals who can help. Still not sure where to turn? Ask a friend, family member, or colleague for recommendations. Debt is incredibly common, so they may be able to refer you to local professionals in the area.