Debt management plans can be the only alternative for those who feel their expenses have gotten out of hand. When paying off your bills every month is not longer enough to make a dent in your debt, debt management may be the right next step. While the process is not right for everyone and it comes with some drawbacks, it's worth considering as a solution.
Function
Debt management plans can be ordered by a court when lenders appeal a debt that you are not longer complying with. As a result, the court establishes a repayment list, which includes all your debts in the order that they must be paid. Accounts are frozen at the time, so no further interest is accumulated. Once the order has been set in place, the court will determine how much of your monthly earnings you can keep in order to sustain yourself and your family. Everything else will go towards paying off your debt. If you falter on the payments, the court will take possession of your house, car or other major items. If you have nothing to back up the payments, you might be taken to prison.
Features
You can set up your own debt management plan before one is ordered by consulting with a debt advice agency. Agencies charge a set fee for administration costs, plus a 15 percent or more of your monthly payment. In return, agencies will negotiate debts for you and set up a payment plan so you no longer have to deal with the creditors directly. While this will increase your total debt due to the added expenses, agencies are sometimes more successful in negotiating payment plans and discounts that you would be on your own.
Considerations
Debt management plans are usually set up through credit counseling agencies. Once set up, you pay a the agency a single lump payment, which the agency then distributes among your debtors, including bills, loans and credit card payments. Payments are made according to a schedule and may pay equal amounts to different debts or concentrate in the ones that are highest first.
Warning
Setting up a debt management plan will affect your credit score. In most cases, it will show up in your credit report as a failure to pay and a further agreement to get rid of the debt. It's also important to keep in mind that agencies may not always be able to save you money on interest payments or discounts, so you may end up paying fees to the agency without any significant savings to show for it.
Once arrangements have been made and payments are starting to go forward, always contact the creditors on your own to confirm that the agency is fulfilling its promises. Always make sure that you make your monthly limp payment in time, as being late can result in severe penalties or your arrangement being canceled.
Expert Insight
When searching for a credit counseling or debt management agency, always ask questions. Make sure you understand what services are offered and for what price, as well as whether there are additional fees or hidden expenses you need to worry about. The ideal organization will offer a variety of services, from payment management to debt counseling to budgeting advice. This will ensure that not only are you getting out of debt, but you're also learning all necessary skills to avoid getting into the same situation later on.
Also, find out if the agency is state licensed, what qualifications do the counselors have, what the written contract includes, and how is personal information kept safe. Ideally, you want a company that doesn't sell your data or shares its information with other agencies.
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