Key Takeaways

Debt can be an effective method to support your income and financial needs. However, taking on more debt than you can handle becomes problematic in the future. 

For example, many people run multiple credit card accounts to manage their expenses but need help with money management. 

When you are taking on a new debt or not in a position to repay your existing debt, seeking the help of a debt management plan becomes essential. 

In this article, we will help you learn about what a debt management plan does and how to make one and benefit from it. 

What Is Debt Management?

Debt management refers to creating a plan to handle your debt liabilities effectively.

The aim is to make your repayments on time and pay off your debt without hurting your credit score. It is essential to your financial well-being because unmanaged debts can have serious consequences. 

Here's what can happen if you do not manage your debts properly:

  • You can get overburdened with debt over time.
  • Missed payments or defaults on loans ruin your credit score and credit history. It makes you ineligible for taking on unsecured debts in the future and may also attract penalties and legal action.
  • Seizure of assets pledged as collateral when you default on a secured loan
  • High-interest rates on future debts
  • Calls from debt collectors for missed payments
  • Lost peace of mind

Managing debt becomes even more crucial when you have a secured debt. Since defaulting on such loans pose a risk to your collateral and may also disrupt your long-term financial planning. 

How Debt Management Works

There are a few different approaches to managing your debt. Here are the best ones:

Do-It-Yourself Debt Management

The most accessible and responsible approach to managing your debt is by doing it yourself. The most significant advantage of this DIY approach is that it motivates you to gather more financial education and makes you self-reliant. 

Additionally, no one understands your financial situation, spending habits, and mindset better than you. Here's what you can do for DIY debt management:

  • Only take a debt you are confident about repaying. Contemplate if you need a debt and take some time to figure out how you will repay it.  
  • Do not overspend using debts. Treat your debts carefully; do not take any extra obligation unnecessarily.
  • Try to repay and become debt-free as quickly as you can. Never miss your monthly payments to avoid late fees, or make the minimum payments at the least. Try the debt snowball method or debt avalanche method to repay multiple debts.
  • Prepare an emergency fund for unforeseen problems like high medical bills
  • Negotiate with your lenders for a better repayment plan. 

Remember that this is a prevention is better than cure approach, where you stay disciplined and repay on time. If your debts are not streamlined, and you need help with management, consider the following credit counseling method. 

Debt Management with Credit Counseling

Under this approach, you use a credit counseling organization or professional credit counselor's services to develop an effective debt management strategy.

These counselors can be for-profit and not-for-profit; however, the latter is more common. You can search NFCC's website (National Foundation for Credit Counseling) to find the best-certified credit counselors. 

The counselor takes charge of all your debt accounts and develops a strategy to pay and close your debts as quickly as possible.

This can include negotiating with creditors, talking to debt collectors for defaulted loan accounts and debt relief options, scouring balance transfer debt consolidation plans, and providing financial counseling sessions. 

Counselors sometimes make your monthly payments on your behalf, whereas in some cases, you have to pay them individually on your own. 

There are only two drawbacks to this approach - first, you'll have to pay the counselor a setup fee and a monthly fee, and second, you will relinquish control of your debt accounts during counseling.

Debt Management with a Debt Relief Company

Enrolling in a debt management program is the last resort to tackling your mismanaged debts.

These programs are offered by for-profit or nonprofit debt relief companies or consumer credit counseling agencies and only for unsecured debts such as credit cards and personal loans.

Although you can also talk directly to your creditor and negotiate a debt relief plan - most creditors, such as credit card companies, won’t take you that seriously.

The intermediary (debt relief company) negotiates with your creditor for lower interest rates on your outstanding debt payments and sets up a payment plan.

The company/counselor collects the payment from you in their account and disburses the monthly payments into the creditors' accounts on your behalf.

So you only make one payment and do not worry about managing multiple monthly payments. These plans usually last between three and five years. 

The difference between this and the previous approach is that while you are using the services of a debt management company, you cannot borrow any new credit.

This includes any new credit card debt, personal loans, or other unsecured types of debts, with student loans being an exclusion.

When Should You Get Help from a Debt Management Company:

  • You have multiple high-interest unsecured debt accounts, and you are unable to manage/pay them.
  • You don't need to open a new credit account anytime soon.
  • Your credit report is degrading or already ruined.

How to Qualify for Debt Management

Here are the prerequisites to qualify for a debt management program:

  1. Only unsecured debts are eligible for a DMP. There's no minimum debt required to qualify.
  2. A reliable source of income
  3. Your income is neither too low nor too high for your debts

If you're unsure if you qualify, or would like to see a more personalized program layout, take advantage of a free debt management quote.

How Debt Management Affects Your Credit Score

Usually, DIY-debt management will help you improve your credit score because you stay on time with your debt payments.

On the other hand, if you have opted for a debt management program with a relief company, your credit score should see a positive impact in the long term. Alongside a timely payment history, you will also start to quickly reduce your debts. 

Finally, if you are enrolled in a credit counseling or debt management program, it will appear on your credit report. It may not affect your credit score, but most lenders will not lend to you if you are enrolled in one of these programs.

Debt management through a certified counselor is the right approach when you are overburdened with multiple debts. If these DMP’s do not work for you, the next best approach is to look for debt relief companies that will assist you with negotiating with your creditors and coming to terms through a debt relief program.