JULY 15, 2022 – With debt in the United States at all-time highs, it’s getting harder and harder for Americans to lift themselves out of it. So what are some of the best ways to get out of debt, and what is a debt management plan?
What is a Debt Management Plan?
A debt management plan can encompass a variety of different approaches designed to enable you to take control of your debt. While there are quite a few strategies out there for you to utilize, the term mainly refers to two specific plans—debt consolidation, and debt settlement.
While it can be difficult to figure out which one of these strategies will work best for you, having a baseline understanding of these strategies can help you figure it all out. So, what are these strategies, and how do you know if they’re right for you?
What is Debt Consolidation?
Debt consolidation is a type of debt management plan meant to help out with unsecured debt. Unsecured debt is any type of debt that isn’t backed up by collateral, and while that most often means credit card debt, there are other types that could be included in your plan.
These types of debts often have high-interest rates due to the risk the creditor takes on. And these debts can quickly become a runaway train if the consumer happens to fall behind.
Debt consolidation works by paying off those unsecured debts and giving the consumer a new loan that has a reduced interest rate. This grants the consumer the ability to pay off the debt at a slower rate while reducing their overall burden over time.
How do I Know if Consolidation is Right For Me?
There are a number of factors to consider when looking at all the different debt management plans out there, and it’s important to consider them all before jumping into a long-term deal. When it comes to consolidation, you’ll want to be fairly certain that you’ll have a steady income, and that you’ll be able to pay off the debt over the course of around 5 years. Both the type of debt and the amount, you have is also of consideration.
This is due to consolidation being mainly for unsecured debts like credit cards, medical debts, payday loans, store cards, or gas cards. It’s also important to be aware of the fact that being in a debt management program that involves consolidation often results in rejection from potential creditors during your participation in the program. So keep that in mind if you foresee a need to open up new lines of credit.
What is Debt Settlement?
Debt settlement takes on a much different form than consolidation and is regarded as a riskier form of debt management. This is due to the fact that while engaging in this type of debt management plan you’ll stop paying your outstanding balances. Instead, the money you would have been paying on those balances will go into a secured account with the company that’s managing your program.
This account will grow over the course of about 2-4 years, and as it does, the company you’ve picked will begin to negotiate with your creditors. This allows them to leverage the amount you’ve accumulated in the account and gives you the opportunity to settle for a portion of the original debt, rather than the total amount.
Depending on the company you use, and the creditor you owe money to, this could result in large savings on your behalf. For more in-depth information on the topic, click here.
How Do I Know if Debt Settlement is Right For Me?
As with consolidation, there are a number of different factors you’ll want to keep in mind while considering settlement. One such factor will be the length of time you’ll be involved in the process. It can last anywhere from 2-4 years, and you’ll have to make payments on a regular basis to build up a healthy account worth leveraging in negotiations.
You’ll also want to look into the company you’ll be working with to make sure they’re legitimate and will work to the best of their ability to help consumers like you. Another consideration would be the potential that your creditor could end up suing to recover their debt. As unlike in consolidation, being in a debt settlement program doesn’t protect you from a lawsuit.
While debt settlement works towards that goal, it’s possible for creditors to become impatient. But even in the case that you’re served, or the company has notified you of their intent, you’ll still have an opportunity to negotiate with the creditor before a judgment is made.
How Do I Avoid Getting into Debt in the First Place?
Sometimes, going into debt can be unavoidable, like in the case of a sudden medical expense, or any other type of emergency. That’s why you should try to plan ahead for sudden events that can leave you in a bad place.
So having a rainy day fund can help you dig your way out of a tight spot. Making a budget, and sticking with it, can help you build up savings for emergencies like these, and give you a little wiggle room when dealing with any short-term debt you may need to accrue.
Cultivating a good sense of financial literacy can be difficult, but looking at good sources of information like the Consumer Financial Protection Bureau can help you stay aware of potential debt traps, and steer you towards healthy financial habits.
Staying up to date on the latest tips, you can take charge of your own debt management. Not only does this help cast the burden of debt off of you, it can also give you a sense of control in your life that you might not have had before. And once you’re finally out of debt, you’ll be glad you asked, “What is a debt management plan?”