JULY 15, 2022 – As debt in the United States hits historic highs, it’s getting harder and harder for Americans to get out of it. So what are the best ways to get out of debt and what is a debt management plan?
What is a Debt Management Plan?
A debt management plan can encompass a variety of different approaches designed to help you take control of your debt. Although there are many strategies to use, the term primarily refers to two specific plans: debt consolidation and debt settlement.
Although it can be difficult to determine which of these strategies will work best for you, a basic understanding of these strategies can help you understand everything. So what are these strategies and how do you know if they are right for you?
What is debt consolidation?
Debt consolidation is a type of debt management plan meant to help with unsecured debt. Unsecured debt is any type of debt that is not secured by collateral, and while this most commonly means credit card debt, there are other types that could be included in your plan.
These types of debt often have high interest rates due to the risk the creditor takes. And these debts can quickly become a runaway train if the consumer manages to fall behind.
Debt consolidation works by paying off these unsecured debts and providing the consumer with a new loan at a lower interest rate. This allows the consumer to pay off debt at a slower rate while reducing their overall burden over time.
How do I know if consolidation is right for me?
There are a number of factors to consider when considering all of the different debt management plans, and it’s important to consider all of them before embarking on a long-term deal. When it comes to consolidation, you’ll want to be fairly certain that you’ll have a steady income and be able to pay off the debt over a period of about 5 years. The type of debt and the amount you have are also to be taken into consideration.
This is because consolidation is mostly for unsecured debts such as credit cards, medical debts, payday loans, store cards, or gas cards. It is also important to be aware that being in a debt management program that involves consolidation often leads to rejection from potential creditors when you participate in the program. So keep that in mind if you anticipate needing to open new lines of credit.
What is Debt Settlement?
Debt settlement takes a very different form from consolidation and is considered a riskier form of debt management. This is because by engaging in this type of debt management plan, you will stop paying your outstanding balances. Instead, the money you would have paid from these balances will go into a secure account with the company that runs your program.
This account will grow over the course of approximately 2-4 years, and in doing so, the company you have chosen will begin to negotiate with your creditors. This allows them to take advantage of the amount you have accumulated in the account and gives you the option of settling part of the original debt, rather than the full amount.
Depending on the company you use and the creditor you owe money to, this could result in significant savings on your behalf. For more detailed information on the subject, click here.
How do I know if debt settlement is right for me?
As with consolidation, there are a number of different factors you will want to keep in mind when considering settlement. One of these factors will be how long you will be involved in the process. It can last for 2-4 years and you will need to make regular payments to build up a healthy account worth leveraging in trading.
You’ll also want to research the company you’ll be working with to make sure they’re legit and will work to the best of their abilities to help consumers like you. Another consideration would be the possibility that your creditor might end up suing to collect their debt. Unlike consolidation, being in a debt settlement program does not protect you from a lawsuit.
While debt settlement works toward this goal, creditors may grow impatient. But even in the event that you are served or the company has informed you of its intention, you will still have the opportunity to negotiate with the creditor before a judgment is rendered.
How can I avoid getting into debt in the first place?
Sometimes getting into debt can be unavoidable, such as with a sudden medical expense or any other type of emergency. This is why you should try to plan ahead for sudden events that can put you in a difficult situation.
So having a rainy day fund can help you get out of a tough spot. Setting a budget and sticking to it can help you accumulate savings for emergencies like these and give you a little leeway when you’re dealing with any short-term debt you may have to rack up.
Cultivating a good sense of financial literacy can be difficult, but consulting good sources of information like the Consumer Financial Protection Bureau can help you stay aware of potential debt pitfalls and steer you towards healthy financial habits. .
By keeping up to date with the latest advice, you can take charge of your own debt management. Not only does it help relieve you of the burden of debt, but it can also give you a sense of control over your life that you may not have had before. And once you’re finally out of debt, you’ll be glad you asked, “What is a debt management plan?” »