Everything you need to know about debt management
In this article, we will talk about the debt management plan, how to figure the right steps you can get the debts you owe off your shoulders.
Owing a debt itself is like a treadmill. You pay a little credit here or a small loan there, and by the end of it all, you are left with almost nothing. Debt is overwhelming
And it can take any form across credit cards, medical bills, bank loans, bank overdrafts, and personal loans.
Statistics show that an average American owes over $8,701 in credit card debt. An average U.S. resident also earns around $94,800, which is about $7,900 monthly. And still, over 41.2% of these households have credit cards.
When you look at these numbers, you realize that the debt figure could be enormous. This creates no room for doubt when you see that the total consumer debt in the U.S. is about $14.1 trillion.
And that means you and I have some form of debt to worry about, especially if we haven’t been making too right decisions.
Regardless of the circumstances, it’s essential to manage it before it takes over our lives.
What is a Debt Management Plan?
Debt management is simply an agreement between a non-profit credit counseling agency and your creditors for repayment of debts on an agreed time. Time intervals range from 36 to 60 months. The non-profit credit counseling agency will help negotiate to reduce or waive fees and finance charges. Your assigned counselor will create a plan for you, including expenses, assets, income, utility bills, rent/mortgage, and so on.
With your full accounting, she will also help you determine the right option or schedule for your repayment. Usually, the financial counseling session will be free, but enrolling requires a startup and monthly fee. You can expect to pay between $30 to $50 for sign up and $20 to $75 every month.
Now imagine what your life would be like if you don’t owe anyone anything, not even a single penny! Isn’t that great? Especially if you have saved enough money for retirement and not having to worry about student loans and zero credit card payment sounds like a breathtaking relief, right?
Pitfalls you need to avoid with a debt management plan.
With a debt management plan, you will receive all kinds of advice, including budgeting advice, financial counseling, and credit counseling. Your counselor will also help you avoid bankruptcy and get back on your fit.
However, here’s what a debt management plan isn’t:
“A debt management plan is not a magic bullet to get you out of debt; your GRIT, HARDWORK, and PERSISTENCE determines how soon you get out of debt”.
Therefore, there are also pitfalls to debt management plans; here are a few you should look out for:
1. Stay clear of unscrupulous agents
Be sure you are actually signing up for a service you need, so you don’t end up paying lots of money to a disreputable agency. Here are some common debt management scams you should look out for:
- The agency’s failure to pay creditors on time according to the terms of the plan
- not paying creditors at all and keeping the deposits consumers make
- making promises—like lower interest rates and reduced fees from creditors—that the company can’t or won’t keep
- charging high fees to consumers
- exaggerating the number of money consumers will save with a debt management plan
- lying about the company’s non-profit status and using this status to attract customers, then funneling unreasonably high fees to a for-profit company, and
- Promising to provide financial advice and education to consumers, then just automatically enrolling customers in a debt management plan, without giving any kind of counseling.
2. Debt plans can be costly
Even if you get a legit company, plans can be costly. So before you sign up for any service, be sure you need it. Usually, debt management companies get paired from the creditors in the form of “contributions” or “donations,” which can be high. If you are working with a legit credit counseling agency, they might let go of these fees, especially if your income is low. Bear in mind that whatever is paid to the agency has the potential of being used to pay the debt. Some agencies may even charge you for their services, so read the fine print to know what is expected of you.
3. Check other ways to get rid of debt
Before signing up for a debt management plan, ensure you check all different ways to be sure that’s the best method for you. Some times, you may have other debt-relief options available to your situation, such as:
- Paying on your own
- debt settlement
- debt consolidation plan
- Chapter 7 Bankruptcy
- Chapter 13 Bankruptcy
- Individual Voluntary Arrangement
- Debt relief order
4. How to protect yourself from debt management scams?
If you opt for a debt management plan, here are ways to find a reputable non-profit credit counseling agency:
- Ensure the company is accredited especially by the International Organization for Standardization (ISO) or Council on Accreditation (COA)
- Opt for a Consumer Credit Counselling Service (CCS) agency that is a member of the National Foundation for Credit Counseling (NFCC) and accredited by the COA
- Ensure the counselors have accreditations from an independent agency and have passed applicable certifications in areas of bankruptcy, counseling, budgeting, credit, and consumer law, debt management.
- Check out your local consumer protection agencies or the Better Business Bureau to figure out if their complaints filed against the company.
How to make a debt management plan for you
Now in other to repay your credits or loans, you need to map out a smart strategy that is realistic for you to follow. Your counselor can help you put the plan together, but ensure you follow them strictly.
I would explain a few.
1. List every single debt that you owe.
It could be student loans, mortgages, dept store cards, etc. with interest rates. Make a chart of debts or loans either from the highest interest rate to the lowest rate vice versa. Most people will start by listing with the highest interest rate, for example.
- Student loans – $1000 – 40%
- Mortgage – $500 – 15%
- Dept store cards – $3500 -5%
It seems logical to take off the big ones with higher rates, yes? But let’s switch things over, how about paying off the debt that gives you psychological problems because of their deadlines. It could be the debt with the lowest rates or perhaps an obligation or a loan that involves a family. Now taking that one off the chart, you realize that you are a bit more relaxed, and you can say to yourself, “yes, I can do this.” Surely and slowly, you will.
2. Have a side hustle
You must understand money is a tool for you. Now, if you do a survey on your income and it doesn’t match up to the lifestyle you desire or paying off your debts in 3 or 6 months, then you need to focus on increasing your income. It could be anything, especially if it’s something you love doing: starting a blog, teaching after school classes. Can you ski? How about teaching someone how to ski during winter.
What about setting up a bake sale, becoming an Uber driver, tour guide, nanny, or perhaps getting paid to write. There are all kinds of things, something that could bring more money to you. Even so, this work can also deliver value to yourself while you have something extra to pay your debts.
3. Budget your expenses
You need to list out what you need, not what you want. You ought to keep your expenses low, don’t go buying that outfit or owning the newest model of gadget or the latest kicks that would sink you down into more debt and stress.
It’s about being debt-free here, so it’s advisable to turn down the notch a bit in terms of spending. Take the subway or bus if you must. Take walks; it is healthier.
Cook your food because it’s healthier. Make your coffee. With these little changes, you come to realize you tend to have bucks to spare.
Have a data-driven approach to your spending. Map your expenses and stick to them. Your chart can be made by categorizing by the most essentials: rent, investment, utilities, etc. You should also find an expense app to help you keep track of your expenses.
4. Sell off your “assets.”
Warren Buffett once said: “if you buy things that you don’t need, you will have to sell things that you need.”
Don’t buy useless or depreciating assets that you can’t use or sell overtime. Most of us have old furniture, mobile phones, electronic appliances like television, microwave, computer gadgets, designer bags, musical instruments, sports equipment, that we don’t need. Look for ways to make spare bucks from them. There are tons of sites where you can get buyers and sell for reasonable prices.
5. Always have a backup
By backup, I mean a savings account or an emergency account where you throw in extra cash. It is imperative to develop a habit of saving for a rainy day. Living from paycheck to paycheck can cause a lot of heartbreak if there comes something you need to pay in a short time.
Now, these debt management strategies also work whether you have a debt to pay or not. It can help you get out of debt and stay off it if applied with discipline. What are you struggling with currently? Share your story in the comment section.