Debt management is also referred to as credit counseling and the industry continues to thrive these days as more people are sinking further in debt. A debt management program is just right for anyone who is struggling with repaying debts on credit cards, store cards, and loans.
Credit counseling agencies offer an easy way to cope with debts via multiple attractive plans. These plans otherwise called programs have been designed as a life jacket that gets you right back on track. Debt management plans are there to help you but they can also be detrimental when a poor organization is consulted.
It is important to stress that a debt management plan is not a loan. The common thing about debt management plans is that the hired company works with your creditors in your stead to reduce your monthly payments. They also cut down the interest rate on your debt and expel penalties where possible.
Your debt management company agrees with your creditors on a convenient payment schedule that provides for about 3-5 years for the debt to be paid off. A typical debt management plan is part of a debt consolidation plan.
These plans are structured to help consumers take control of their finances while alleviating unsecured debts. Unsecured debts are debts that do not have a collateral backing and they include medical bills, student loans, and credit cards.
Unlike what people think, there is no such plan that can be referred to as the best debt consolidation. Every debt consolidation plan has its own pros and cons. A good debt consolidation plan must have some basic features before it can be tagged as a great way to ease your financial burden. There are some things you should know about debt consolidation plans and maybe they are right for you.
The first thing you should know is the classification of debts and which qualifies for a debt consolidation plan.
There are basically 2 types of debt – priority and non-priority debt.
Priority debts include expenses like gas and electricity bills, mortgage and rent arrears, magistrates’ court fines, council tax, rate arrears, income or VAT arrears, etc.
Non-priority debts, on the other hand, are debts that are usually not recurrent or short-termed. They include things like student loans, credit card, bank loans, benefits overpayment, housing loans and more.
A debt management plan only works for non-priority debts and it is quite important to take note of this.
Non-credit status – Don’t be deceived
Every debt consolidation vendor is set up to make money. They hide under a professional disguise to act like they are a non-profit making venture who has your best interest at heart. Debt consolidation companies charge for their services although it’s a fair monthly payment.
It’s a third party system
Juggling different accounts could be tiring and with a debt management plan, only one payment is made to your consolidator who then distributes accordingly to your creditors until everyone has received full payment.
Debt management agencies do not process loans or settle debts. They have a pre-arrangement with financial institutions who often lower their rates and fees. This means that more of your payment goes in the direction of the balance than your finance charges.
The core of what debt management companies do is simply contacting your creditors and discussing alternative payment plans with subsidized rates and fees. This means that you could also do it yourself. Most creditors would like to help you out of your financial mess to avoid you going bankrupt which isn’t good for them. Negotiating directly with them wouldn’t be an easy task but success can be achieved.
Counseling Should Come Before Consolidation
Consolidation isn’t the only way out and most people don’t know. There are better alternatives. Consolidation should be a product of a counseling appointment where your financial situation has been properly accessed.
After your expenses have been subtracted from your income and there is still enough money left, consolidation alongside other options may be presented. A great counselor who is knowledgeable will enlighten and motivate you because it’s quite important to understand these vital part of the debt management process.
Debt Consolidation Isn’t For Everyone
As strange as it may sound, debt consolidation isn’t for everyone. How do you determine if a consolidation is what you need? Or if a debt management plan fits your situation? The first indicator should reveal that the larger part of your balances should be dominated by unsecured debts like personal loans, credit and charge cards, collection accounts, etc.
If your debts include liabilities like unpaid child support, parking tickets, tax debt, these plans won’t be effective.
The most important thing is that you should be confident of being able to pay beyond the first and second month. You should be able to pay for years if not, opt out of consolidation.
All Plans are Similar
Contrary to what people call the best debt consolidation, some things are common to all plans. Financial institutions do not treat any particular organization or agency better than the rest. This means that only the agencies and the employees vary, the plans pretty much have an identical structure.
It is the duty of your counselor to determine how long you’ll be needing to pay your creditors in full – usually 3-5 years.
Payment is usually 2.5% of the total debt sum although, in extreme situations, there is room for negotiations. A plan can be stopped at any time, you can also pay more or clear the debt faster when you have extra cash.
The Quality Of The Agency Matters
Your finances require the best handler and the quality of who you work with matters. Ensure that who you are hiring belongs to organizations in their category like the Financial Counselling Association of America and National Association for Credit Counselling.
Members of these organizations are usually put through rigorous tests to ensure professionalism and their counselors usually pass a thorough certification program. The agency you are hiring should be absolutely systemic and timely. Payments and statements should be forwarded on time and customer education and support should also be a top priority.
You may also want to read Debt Consolidation for Bad Credit