Learn How to Set Up Your Debt Management Plan
- 6 min read
- A successful debt management plan starts with planning.
- Set Your Budget and Learn about debt relief option.
- Use professional help to accomplish your goals and be persistent.
Put Together Your Debt Management Plan
Do you feel like your finances are falling apart? Does it seem like an impossible task to put them back in order? Fortunately, your financial situation is something you can work on. You can create a debt management plan and strengthen your weakest link.
In order to deal with your debt properly you will need a debt management plan. For some, a do-it-yourself approach is a doable alternative. For others, professional assistance is mandatory. For all of us, learning about budgeting, taking out loans, and maintain proper financial habits is necessary.
One common debt relief solution is credit counseling, which includes a debt management plan (DMP). But before you consider that solution, learn about setting up Your debt management plan by learning about:
- Your Budget
- Debt relief options
- Management techniques
Debt Management Plan: Step 1 - Your Budget
The first step is to gather information and create your preliminary budget. Before you can deal with your debt and make a workable debt management plan, you need to know how much you:
- Make - Your income
- Spend - Your expenses
- Owe - Your debt
- Have - Your assets.
Making a budget takes time. You have to gather all your initial information and then follow and track your monthly expenses. I recommend that you use the Bills.com budget guide to help you get started. In addition, there are on line tools to help you track your spending and debt.
No matter which debt relief option you choose, a financial advisor will want to know your basic financial situation. Only then can they determine if you can afford your payments, consolidate your debt, or need to look for alternatives that are more drastic such as debt settlement or bankruptcy.
Look for a Debt Management Plan that fits your situation
If you are looking for a debt relief solution, fitted to your financial situation, then use Bills.com Debt Navigator.
Debt Management Plan: Step 2 – Learn about Debt Relief Options
Your next step is to educate yourself about debt relief options including:
Optimizing your payments: For some, there only problem is balancing their budget and paying off their loans in a timely manner. One big mistake is to carry high credit card balances and make minimum payments. Not only is your credit score lowered (due to high credit utilization), but you end up paying huge financial costs on your credit card, which means paying huge costs for your purchases. Try out Bills.com minimum payment calculator to see just how much a $5000 balance at 18% interest, with 2% minimum payments, will cost you and how long it will take. (I bet you didn’t imagine that it would be so expensive).
Consolidating your debt: If you have a good credit score and not too high of a debt load, then consider a personal loan consolidation to manage your debt. By consolidating your existing debt into a new loan you save on financial costs by finishing the loan in a short period of time (1-5 years) and at a lower interest rate than your credit cards. However, don’t expect a cheap loan, because it is still an unsecured loan. If you have a home with equity (you can usually refinance up to 80% without mortgage insurance), then look into a home equity loan or a cash-out refinance. The advantage of a mortgage loan is low monthly payments, because you can spread your debt over a long time, up to 30-years. The big disadvantage is that you turn unsecured debt into secured debt (and directly jeopardize your home in case of default) and pay more financial costs due to the long period.
Consolidating your payments: While a loan consolidation is new debt to pay off your current debt, a credit counseling (and debt management plan) consolidates your monthly payments. A credit counseling (CC) program helps you build your budget and financial plan. Then, if it seems like you can pay off your debts (100% plus interest) over a 3-5 year period, you can enter a debt management plan. The CC firm negotiates lower interest rates and fees with your creditors. You make one payment to the CC firm, who pays off your creditors. Make sure that your payments are made on time, especially during the transition period. You will pay a fee for the service.
Negotiating a debt settlement: Sometimes your original creditor, or a 3rd party debt collector will agree to negotiate a settlement for less than you owe. In general, they will only do so if you are not making your payments on time, and you do not have sufficient income and assets to pay off your debt. A creditor usually has the option to sue you and try to obtain a court judgment, which can lead to wage garnishments, bank levies, and liens on your personal property. Those are long and expensive processes. If your creditor feels that they can get a lump sum from you, then they might agree to negotiate a settlement. Remember, 3rd party collection firms buy debts for much less than their face value. Debt settlement is an aggressive form of debt relief. Make sure you work with a reputable debt settlement company, who will give you a free consultation and help you set up a debt management plan appropriate to your financial situation. Don’t pay upfront fees!
Bankruptcy: A chapter 7 bankruptcy, for those in difficult financial hardships, discharges your debts, or at least those included in the bankruptcy. (Student loans cannot be included). A chapter 13 bankruptcy includes financial counseling and a court supervised payment plan, usually over a 5 year period. (Federal student loans are not dischargeable, but private student loans can be included in a chapter 13 bankruptcy). I recommend that you seek advice from an experienced local bankruptcy lawyer.
Debt Management Plan: Step 3 – Management Techniques
No matter which debt relief option you choose, you will need to be proactive and on top of your situation. However, that does not mean you have to go it alone. Some debt experts claim that anyone can get debt free, just by paying down their debt quicker. The claim that, anyone can do their own budget, or anyone can negotiate debt settlements.
The do-it-yourself approach is great, and for some is the right approach. By following the first two steps, you can already have your plan in action.
However, for many, professional help is the only way they are going to get their plan formulized, let alone put into actions. If you are in financial trouble and looking help setting up and implementing a debt management plan, then you will be vulnerable to scammers. Do your research and look for a reputable debt settlement and debt relief company. Never pay upfront fees. Make sure that you pay fees for services actually rendered, and debts that are paid off.
Get a Debt Relief Consultation
Contact one of Bills.com's pre-screened debt providers for a free, no-hassle debt relief quote.
Debt Management Plan: Step 4 – Persistence
Nobody said it would be easy to get debt free. Setting up Your Debt Management Plan and making your payments is not an easy thing to do. That is why your plan also includes a fourth step, Persistence. You will need to be persistent in:
- Setting up your budget, tracking your expenses and maintaining your records.
- Finding the best debt relief solution for your financial situation.
- Researching to make sure that you are working with a reputable company.
- And most important: Make your payments on time. Many people sign up for a program, only to stop making their payments. In order to successfully complete your debt management plan, be persistent.
Struggling with debt?
If you are struggling with debt, you are not alone. According to the NY Federal Reserve total household debt as of Quarter Q2 2022 was $16.15 trillion. Student loan debt was $1.59 trillion and credit card debt was $0.89 trillion.
A significant percentage of people in the US are struggling with monthly payments and about 26% of households in the United States have debt in collections. According to data gathered by Urban.org from a sample of credit reports, the median debt in collections is $1,739. Credit card debt is prevalent and 3% have delinquent or derogatory card debt. The median debt in collections is $422.
Each state has its rate of delinquency and share of debts in collections. For example, in Michigan credit card delinquency rate was 3%, and the median credit card debt was $374.
While many households can comfortably pay off their debt, it is clear that many people are struggling with debt. Make sure that you analyze your situation and find the best debt payoff solutions to match your situation.