With a mountain of debts and a bunch of debt management companies offering you their own version of relief from financial load, it is easy to get confused when deciding on the right debt relief route to take. Here is a glimpse of various debt management solutions to help you make that decision.
Differentiating Debt Management Solutions
Debt Management Plan. Your debt management company will review your financial affairs and help you plot a payment plan based on what you can afford. With a DMP, the debt management services provider will negotiate, on your behalf, with you creditors so that you can avail of better terms (lower interest rates, reduced principal, longer term period, etc.) on the condition that you consistently make the new adjusted monthly payment. Instead of paying each of your creditors, you send your total payment to the debt management agency and leave it up to them to distribute payments to each of your creditors. This approach is great for people who are experiencing temporary reduction in income only.
Debt Consolidation Loan. In this approach, you take on a loan with lower interest rate and better terms and use the funding to pay off all your other loans or debts. In this way, you only have to make one payment each month, just like in a DMP, to reduce the confusion of sending payments to each of your creditors. Using the same concept, you can also open a new credit card account with a lower interest rate than the average rate of your existing credit accounts, and transfer your balance to this new account.
Debt Settlement. In this approach, you negotiate with your creditors to accept a reduced balance by 40 to 60 percent as full payment for the debt. This means that your creditor wipes out a chunk of your debt. Besides this, you also get to get rid of interests and fees from the outstanding balance, reducing your monthly payments and making it more affordable for you. Some creditors will re-age your credit accounts updating it to a current status.
Self Repayment Plan. If you have the know-how to objectively analyze your finances and formulate a payment schedule based on this analysis, the discipline to follow a tight budget to make the payments monthly, and the capability of negotiating with creditors, then you can actually manage your debts by yourself.
Bankruptcy. Of all the debt management solutions available, bankruptcy is the least preferred and must only be used as a last resort. All the other solutions are done to avoid this. Nevertheless, it is another way out of your mounting debts.
Disadvantages of Various Debt Management Solutions
Debt Management Plan. Since a debt management plan is not legally binding, your creditors need not accept the repayment plan. Hence, your debt management company must be able to come up with workable plan that will get the creditors to agree. Getting into this program will also increase the number of years that you can settle your debt due to the adjustments. That is why, it may also not be very useful for people with meager net income since they would end up making the repayments over a prolonged number of years, and may be better off filing for bankruptcy. If you think that your capacity to pay your debts will not improve within a year, consider other options. Also, debt management plan will also be reflected on your credit record, thus, affecting your score.
Debt Consolidation Loan. This approach is great for people who have decent credit scores. However, people with marred ratings may have difficulty securing a loan with lower interest rates than the average rate of the other credit accounts that they have to settle. Some may not even be able to secure a loan unless they put up a collateral. If you think you cannot really pay the monthly dues of the consolidation loan, then better not take this road as you might only end up losing a house or a property and still not able to settle your debts.
Debt Settlement. If you are current on your payments, creditors usually do not agree to a debt settlement since it shows that you have the capacity to make the payments. Some debt settlement firms advise clients to fall behind on payments for a certain number of months just to qualify for the debt reduction method. However, they end up hurting their credit scores, and not even sure yet if their creditors would agree to a debt settlement. In the event that you get approved for debt settlement, you may be required to file taxes for the balance waived off by your creditors.
Self Repayment Plan. You have to do all the legwork in coming up with the repayment plan, in negotiating with your creditors, and in sending the payments to each creditor, unless you take the debt consolidation road by yourself. Also, it entails objectivity and all the resolve to make the payments since there is no one to give you a neutral analysis of your situation and guide you on how to go about it. Without a third party prodding you to make payments and collecting fees for their debt management services, it may be very easy for you to get tempted to miss payments.
Bankruptcy. It is considered as a last resort since it negatively impacts your credit rating by at least 200 points.