How does debt management work?

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Are you struggling with your debts? Do you have to pay a lot of credit card bills each month but find it difficult to pay them? Do not worry, as there are many other people who are dealing with the same problem like you. They have piled up lots of debts and now they do not know how to put up with them. They want to know how they can manage their debt and how does debt management work. 

A debt management plan or DMP can help you get rid of your debts pretty quickly. In a debt management plan, you just have to pay some amount of money to a credit counseling agency, which in turn pays your creditors for you. 

Image courtesy: Nerdwallet
Image courtesy: Nerdwallet

A DMP does not cut the owed amount of the debtor, but it lowers the overall payments that they have to make. However, this is only possible, if a credit counselor is able to convince the creditors to drop some fees or accept a lesser rate of interest, which usually is the case.

Moreover, the debtor also gets to stretch out their payments. A debt management plan typically lasts from 3 to 5 years. It not only makes your payments more reasonable, but it also lowers your rates of interest. However, despite of all these benefits, many people still are unable to finish a debt management plan. Therefore, if you plan to take on a DMP, you must consult a bankruptcy lawyer in order to understand all the options that you have. 

Furthermore, a debt management plan has less effect on your credit score as compared to bankruptcy or debt settlement, since in this you pay off your original debt. On the other hand, in debt settlement or bankruptcy, your credit report gets a big blow. 

How does debt management work?

Now, we will tell you how does debt management work. First of all, a credit counselor examines your financial situation scrupulously. Then, they discuss the various options that you have, including a debt management plan. 

You can also consider some other option instead of a DMP; whatever you feel works best for you. Moreover, you can take time to choose your option. Do not rush into taking a DMP as soon as it is offered to you by your credit counselor. 

Then, after you choose a debt management plan for yourself, you must read the terms and conditions of the plan. Most likely you will have to pay a monthly fee as well as an enrollment fee for every credit account that is there in your DMP. But, do not worry as even after adding these payments, your total monthly payment will be lower. 

You must know that a debt management plan does not cover secured debts, like those for cars and houses. Moreover, it also does not cover student loans. However, it covers unsecured debts, like personal loans and credit cards. 

Image courtesy: Consolidated Credit Counseling
Image courtesy: Consolidated Credit Counseling

After this, your credit counselor will call each of your creditors in order to inform them about your DMP. The counselor will then become the payer on your behalf. Your counselor can ask for concessions from each of your creditor. These concessions may include lower monthly payments, lower interest rates, account re-aging to prevent late fees, etc. Every month you have to pay electronically to your counseling agency, which will then pay your creditors.

Every month you will be given a progress report. Remember that you cannot use your credit cards till you are registered in a debt management plan. Moreover, you must consistently make your payments on time, so that your concessions are not withdrawn by your creditors. 

So, this is the answer to how does debt management work. By knowing the working of a debt management plan, you can choose the best one for yourself by contacting a credit counseling agency, which can further help you to get rid of your debt.

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