What is a Debt Management Plan?

In most situations, a debt management plan should be your last consideration. These options could impact your credit score and can make it harder for you to borrow money in the future. The bright side is that these plans can help you if your debt is overbearing and no other option you have tried has been successful.

Debt Plans and How They Work

Different debt management plans are available based on your situation, so you should always evaluate each option as you may be able to choose a plan with a less significant impact on your credit score. In order of least significant impact to most significant, the debt management plans are Consolidation, Negotiation, Repayment Plans, Settlement, and Bankruptcy.

Consolidation

Debt Consolidation is a way to combine all of your debt into one payment. This is important for people who find themselves being frequently blindsided by unexpected debt payments. Consolidating your debt will make your monthly payments easier to manage but at the cost of potentially increasing your interest and payment period, which ultimately makes the total loan more expensive.

Negotiation

You have the option at any time to negotiate with your lender to lower the total amount you owe. It is in the best interest of the lender to get as much money as they can rather than expect an amount you can't pay, so lenders may consider your negotiation, but no lender is obligated to.

Repayment Plans

A Repayment Plan is taking a specific loan and restructuring the terms of payment. Oftentimes, this will lead to a lower payment per month but with a longer-term and potentially higher interest. Lenders are also not required to accept any terms of a Repayment Plan.

Settlement

Suppose you have almost no means to reasonably pay your debt in full. An option before bankruptcy is debt settlement. Debt Settlement is taking a percentage of your total amount owed and offering that sum as grounds for debt forgiveness. Settlement can take years and will stay on your credit report for 7-10 years after the process is completed. Lenders are not required to accept a settlement request, and even after the request is accepted, you will still have to make payments until the process is completed.

Bankruptcy

Bankruptcy should always be a last resort due to its significant negative impact on your credit score. There are two types of Bankruptcy. Chapter 7 is known as Liquidation, and Chapter 13 is known as Reorganization. In Liquidation, your possessions are liquidated (sold for cash) and the sum of your assets is used to pay off your debt. In Reorganization, a repayment plan with high interest is created. Both of these options are almost never ideal for the person in debt, so it is highly advised that you explore all of the previously listed options before declaring bankruptcy.

Staying On Track

All of the above methods are credible ways to manage your debt, but not everybody has access to information about what is and isn't credible, especially those who are often suffering from serious debt.