Everything You Should Know About Debt Management: Pros and Cons
Debt management can be beneficial for handling and reducing your debt. However, it is not a magical fix for all of your problems. While you benefit from freezing interest and/or further fees and charges on current debts, you may face some unwanted consequences as well. Therefore, we recommend being fully informed on the topic before you make a decision.
Below we will examine the pros and cons of debt management. You will learn the most prominent advantages associated with this financial solution, what to be cautious about, and even more importantly, how to mitigate the drawbacks and make them work in your favor.
Obviously, everyone’s situation is different. Other than learning the ins and outs of debt management, you need to determine whether it is a good fit for you personally. Preferably, this process should be assisted by a qualified debt advisor. This way, you are guaranteed the best possible outcome for your situation.
A Debt Management Plan (DMP) is one of the debt management solutions aimed at resolving financial problems and helping you regain control of your finances. Essentially, it is an agreement with a creditor, which allows you to lower the amount of debt owed. In a typical program, you are represented by a debt management company that is going to negotiate the new payment conditions and take care of other aspects of the debt, such as interest rates and penalties.
You can enter a debt management program in cases where you are struggling to make repayments of your unsecured debts at the current rate. Unsecured debt is one that is not backed by collateral. Considering the immense amount of total debt nationwide, the problem of unsecured debt is widespread. The most common types of debt and the ones covered by debt management plans are:
- personal loans
- bank or building society loans
- credit card, store card debts or payday loans
- student loans
- medical bills
- catalog, home credit or in-store credit debts
A debt management program has pros and cons, which you should make a conscious decision to think about. Even though debt management typically extends the amount of time given to repay a debt, it helps you pay back all of your debt in a variety of ways. There are no guarantees the creditors will be on board, but in certain situations, it is sometimes worth a try.
Debt management can ease your financial burden and prevent you from getting into more debt. However, you will still have to make repayments. The fact that you can so at a lower interest rate should help you cope with your debt more successfully. But it will still require some effort on your part.
When starting your debt management journey, you can take two routes: do everything yourself or have a company/specialist represent you. While some people choose to manage the negotiation on their own, the best results are achieved by a professional. First, let’s dissect what a debt management plan involves.
A debt management plan is an informal agreement between you and your creditors to pay all of your debts under new conditions. Debt management plans are usually applied to the following situations:
- You are unable to pay creditors the agreed amount each month
- You have temporary debt problems and are confident that you will be able to make repayments in a few months
The plan can be arranged if you give your creditors valid reasons to believe you can’t currently afford the monthly payments. It means you have to do some preparation in advance and show them an accurate representation of your current financial situation. Before you set up a debt management plan, you need to work out and write down the following information:
- The number of unsecured debts you currently have
- Your monthly income
- All your expenditures
- Your detailed monthly budget
After you have these details established, you can calculate what you have left over each month and how much you can put into repayments. You should not be aspirational in what you plan to achieve. Instead, you should make a realistic estimate leaving enough money for you to live on. Even if you don’t plan on purchasing luxuries, there needs to be enough money in your budget for food and other necessities. Otherwise, you may not be able to follow your new payment plan.
There are some strict rules associated with debt management plans. For example, if you don’t make the agreed payments on time, creditors have the right to reverse the program. You may be obligated to pay your debt in full or even face legal actions. Also, creditors may go back to the original agreement if they believe you have more money than you claim.
Creditors can’t dip their hands into your bank account and forcefully take the money. But it doesn’t mean that this is not their attention. If you want to avoid serious consequences, seek professional financial advice as soon as you encounter problems with creditors.
Your financial situation may change, and you may have more money at your disposal. In this case, you can settle your debts early by offering a full and final settlement on some or all of your debts. So, even if you enroll in a debt management plan, you are not tied to the exact timeframe. If you have the means, you can repay your debt sooner than you might think.
There are many discussions about programs for tackling your debt – pros and cons, benefits and risks, etc. This structured and administered plan has already helped thousands of people and helped then achieve financial stability. The most notable aspects of debt management and the reasons people choose to use it are the following.
Debt advisors have relevant knowledge and experience to negotiate with your creditors. They know tips and tricks for making your creditors agree to favorable terms. The debt solution depends on a variety of factors, and when you have a professional on your side, you increase your chances of success.
A debt adviser will:
- Fully take on the responsibility of negotiating with creditors
- Suggest solutions that you didn’t consider
- Advise you on how to handle your income, expenses, budget, etc.
- Do their best to provide you with all the benefits and entitlements available to you
Even just a simple conversation with an experienced specialist will make it clear what you should and shouldn’t do. If you make the right decisions from the start, you will be debt-free sooner than you expected. Additionally, advisors can provide you with much-needed support during such a confusing and stressful time.
A negotiator can arrange lower monthly payments, which can be a lifesaver for many people. Chances are the main reason you are currently struggling with your payments is that the amount is unaffordable for you. With debt management, you can achieve better terms, which helps you stick to the payment schedule.
If something changes, for example, your monthly income grows, you can allocate that sum to payments and finish your plan ahead of time. In any case, you have the opportunity to stay within your budget and remove yourself from the problematic debt cycle.
Many people agree that creditors can be extremely annoying, and you probably would like them to stop harassing you for payment. In their defense, constant calls and reminders are the most efficient way to make people stick to the schedule.
A debt management advisor communicates with creditors on your behalf. It means significantly less contact with them and sometimes even no contact. You will no longer have to answer the constant calls, which adds to the stress. Once creditors and your advisor agree, there will be no need to interact as long as you make the required repayments.
Also, creditors often threaten to take further action to scare you. When you work with a debt management company, the specialists can handle it. They realize that creditors often exaggerate what may happen and approach the conversation in a reasonable way.
Not everyone possesses an adequate level of financial literacy. It is not something you should be ashamed of, but you should still address it. People often make the mistake of not seeking professional advice and find themselves in situations when:
- their cards are maxed out
- no one else will let them borrow more credit
- things have spiraled out of control, and it will take a lot of time and effort to get out of the amount of debt they’re in
As soon as you receive a structured plan for tackling your debt, you will feel less stressed and anxious. It will give you a sense of comfort and motivation to make a real effort. Compare the terms of your new repayment plan with your budget and come up with the correct income allocation.
Let’s compare debt management with Chapter 13 bankruptcy. When you declare bankruptcy, you have to pay off part or all of your debt following a court-approved plan. Whereas with debt management, you can resolve your debt without the hassle of legal proceedings.
Debt management doesn’t affect your assets. It means you won’t have to sell your home, your car, or any other assets. However, if you decide to sell some of your assets, you can get a jumpstart on your and shorten the repayment schedule. For example, if you have two or more cars, it may be smart to pay down your balances after selling one of them.
The main point is that you are not legally obligated to do so. If you and your advisor believe it is the best course of action, you can sell your assets. Otherwise, you can deduct your payments from your income as usual.
Being added to the Individual Insolvency Register has a lasting effect on your credit report. Also, the aftermath may involve:
- restrictions on financial activities
- assets being at risk
- limited future employment options
Debt management is considered an informal debt solution. Essentially, this means the details of your arrangement are not recorded on a public insolvency register. All the consequences of insolvency solutions listed above will not apply to your situation. Also, it means you have no obligation to disclose your debt management plan, which allows you to do everything discreetly.
Repaying your debt is certainly better than sending partial payments, making no payments, or declaring bankruptcy. However, there are essential disadvantages of a debt management plan that you should always consider. Here is our list of cons:
No Legal Protection
While the informality of the agreement has benefits, such as no indication of insolvency on your history, it may cause some trouble. The terms of debt management are not legally binding, which means you can exit the program, and so can your creditors. As discussed above, they can overturn the agreement, for example, if they believe you can pay the debt in full.
Everything you agree on can be revisited. So, do your best to follow the requirements on your side to keep them satisfied.
The benefit of having lower monthly bills is met with a downside. It will take longer to pay back the money, which means your journey to a debt-free life moves further away. For some, it may be extremely bothersome.
There is no fixed period, so the program length will depend on the amount of your debt. If you make an effort to repay the debt ahead of time, you will make your life significantly easier. However, most people remain in the program for years.
A creditor considering you for new credit will review creditworthiness based on the following criteria:
- Established credit – timely payments on credit accounts for two or more years
- A stable income
- A credit score (FICO score) that meets the bank’s minimum criteria.
People participating in a debt management program often have a high debt-to-income ratio, which is not a preferred precedent for new creditors. Your debt management company doesn’t inform your bank nor your employer about your participation in the program. However, this may be marked on your credit report. It may become a reason for new credit disapproval.
It doesn’t mean there is no chance of getting approved. But even if you manage to receive additional credit, you need to be extra cautious. Since you already have a payment plan, you may not want to add another expense.
According to the Federal Trade Commission, people pay hundreds of dollars to scam companies and lose their money as a result. For example, there was a case with illegal robocalls claiming it was a non-profit group. They posed as a debt- and mortgage-relief company and promised credit card interest rates as low as zero percent. Before working with any company, make sure they are trustworthy.
The notation signifying your debt management may initially send up red flags. However, the effect of the program is rather complex, making a positive, as well as a negative impact on your credit score. Here is an approximate credit score breakdown to illustrate how a debt management plan will affect your credit score:
- 35% is determined by payment history – Provided you make payments on time every month, the plan will have a positive effect
- 30% is based on credit utilization – As the balances are paid down, the score will be positively affected
- 15% is dictated by the length of credit history – Unfortunately, debt management makes a negative impact in this instance
- 10% is based on inquiries for a new credit – In most cases, people under the DMP will not have a new credit.
- 10% gets determined by the person’s credit mix – The figure will vary from person to person.
The vital thing to remember is that you should do everything in your power to make the required monthly payments. If you fail to do that, the consequences might be severe, and your credit score will inevitably suffer.
The more you know about debt management, the better equipped you will be. Here is additional information that will help you to avoid significant negative consequences of the programs:
A debt management program is one way to dig your way out of debt troubles, but there are some things that should be considered before enrolling:
- The programs last for three to five years. Not everyone will be able to handle such a big commitment. Make sure you have enough discipline not to drop out of the program.
- You are likely to be left with only one card for emergency use. You should have other financial safety nets for this reason.
- New terms of the debt payment plan are not always accepted by creditors. Therefore, don’t treat the program as a done deal – first, verify whether you were approved.
- Debt management is not a solution for every situation. It’s best to consider all available options before you make the final decision.
The drawbacks of debt management are not inevitable. For example, you have the ability to protect yourself and your funds from scammers. There are clear indications that a company is not honest about their intentions. When you learn these signs, you will be able to see the difference between legitimate and illegitimate companies and make smarter decisions.
When you are already struggling with overwhelming debt, the last thing you need is dealing with fraudulent advisors and losing money. To protect yourself from getting ripped off, avoid companies that:
- Make you pay upfront before any progress is done or even before you have a consultation
- Makes big promises, such as fully getting rid of your unsecured debt
- Guarantee that dealing with a debt collector will be easy and you won’t have to make any compromises
- Don’t provide you with advice or estimated projections about your plan unless you give them your personal and financial information, including credit card and bank account numbers.
Also, you should be able to contact live operators or visit their offices. If the company operates strictly online, offers no consultation with a debt relief expert, and conceals its address, you shouldn’t trust them. Before you submit any sensitive information, you have to be confident in the company’s reliability.
Trustworthy companies, such as DebtQuest, are transparent about what they can and can’t accomplish. There is no reason to give false promises. However, you shouldn’t be disheartened if all of your expectations are not fulfilled. A competent professional is always a great help, and, in most cases, you wouldn’t be able to reach the same outcome without them.
As you can see, there is a lot to learn when it comes to major financial decisions. Take your time to contemplate the pros and cons of debt management. While it may not be an all-encompassing solution to all of your problems, it often becomes an incredible driving force toward your financial independence.
Debt management plans are useful when you’re presently struggling, but expect to be able to pay your debt off eventually. There are advantages in that you might change your payment amount to a more affordable sum, have a better structure and precise plan of action, and finally, create some breathing space and peacefulness.
However, you can’t neglect the negative aspects of debt management. There are no guarantees your creditors will agree, so you have to manage your expectations. And even if they lower the debt, you are not off the hook – you will still have a debt to repay. Also, it may affect your credit rating, and you will have to make more effort to recover from it. But at the end of the day, if you do nothing, it will suffer anyway.
If you’re struggling with your debts, the best thing you can do is approach it responsibly as soon as possible. Whether you choose debt management or take another path, it’s important to make progress; however, you can. Start with researching the topic and finding possible solutions on your own. Once you have a better idea of what you are facing, seek professional expertise, and tackle your debt through a combined effort.