Many of us know that setting financial goals and creating budgets can help us manage our money. However, it’s also important to manage your debt.
Debt management is a way to keep up with your bills, especially if they have seemingly gotten out of control. You can use many strategies to manage your debt, including the debt snowball method or working with a credit counseling organization. In any of these cases, you will create a debt management plan that fits in with your specific budget and financial situation
What is debt management?
Debt management is a way to get your debt under control through financial planning and budgeting. The goal of a debt management plan is to use these strategies to help you lower your current debt and move toward eliminating it.
You can create a debt management plan for yourself or go through credit counseling to help you with your plan. Both ways have advantages and disadvantages. Setting up a plan yourself is the simplest way forward, but sometimes it can be helpful to have an outside partner providing help or accountability.
How does debt management work?
Debt management plans address unsecured debts like credit cards and personal loans. Debt management usually happens in one of two ways.
- DIY debt management
The first option is a DIY version of debt management. In this version, you create a budget for yourself that will allow you to pay off your debts and maintain your financial stability. The debt snowball or debt avalanche methods are DIY versions of debt management.
You can use budget calculators, repayment calculators and financial management apps to help keep you on track. If need be, you can also do some negotiating with your creditors to try and lower your monthly payments or interest rates to help you decrease your debt. Once the debt is under control, you can decide if you want to keep or close an account.
- Debt management with a credit counselor
The second form of debt management is through credit counseling. A credit counselor will help you come up with a plan to repay your balances and can negotiate a debt management plan (DMP) with your creditors if necessary. It usually spans three to five years and includes concessions, like a lower interest rate, reduced monthly payment or fee waivers, to help you get out of debt faster. Depending on your circumstances, the creditor may close your accounts as each debt is paid off to avoid creating any new debt.
- Debt relief company
You also have the option to hire a debt relief company to help resolve your outstanding unsecured debts. These for-profit entities negotiate with creditors and lenders to reach settlement deals for less than what’s owed on the outstanding balance.
When you sign up, you will make monthly payments to the debt relief company held in an account. In the meantime, many debt relief companies will advise you to halt payments to creditors and lenders to speed up the negotiation process.
When a settlement is reached, it’ll be presented to you. If you agree, funds from the account you’ve been paying into will be used to make the payment. The debt relief company will also collect a settlement fee from the same account.