Debt Management Plans & Relevant Legal Concerns
Even if you exercise discretion in your finances, it can be easy to find yourself in debt. No matter how much money you owe, receiving hassling calls from debt collectors and finding yourself unable to take out new lines of credit due to a low credit score can be stressful and daunting. Fortunately, there are several ways to get a handle on your finances. One of the most commonly used methods for resolving debt issues is to establish a debt management plan.
What Is a Debt Management Plan?
Unlike debt negotiation and settlement, a debt management plan involves renegotiating the terms of your outstanding debt obligations in order to find a more manageable arrangement for you and your finances. Creditors may be amenable to a debt management plan because it guarantees that they will see at least some return on their initial loan or extension of credit. Otherwise, the creditor has to risk the debtor filing for bankruptcy. In that case, it is often unlikely that the creditor will see any return on their initial loan or extension of credit.
How Does a Debt Management Plan Work?
In order to establish a debt management plan, a debtor typically needs to contact a credit counseling service or other agency that specializes in debt management plans. Debt management plans offer many types of financial relief for debts, including the cessation of collection calls, lower interest rates, lower monthly payments, and the reduction or elimination of overdraft fees and late fees. In virtually every case, a debt management plan will consolidate all of your obligations into one monthly payment. This can make it easier for debtors to understand how much they will need to pay each month and the total amount of debt that they owe. It also makes it easier to project the amount of interest that will accrue on a particular debt.
One of the most common types of debt is unsecured debt. Unsecured debts are lines of credit that are not backed by any form of personal property, like a house, vehicle, or boat. Credit card companies offer some of the highest and most challenging interest rates. Many times, a credit card holder finds him or herself in debt as the result of an inability to keep up with interest payments. In some situations, these interest charges will recapitalize, which means they are added to the principal amount owed. When the next payment is calculated, the interest amount will be higher because it is calculated based on the new higher principal balance. A debt management plan will typically include negotiating a lower interest rate with your creditor.
For some debtors, the repayment period presents many challenges, in addition to being unable to making your monthly payment obligations. Whether you have received a pay cut or lost your job, there are many reasons why a repayment schedule may become unmanageable. A debt management plan will typically involve renegotiation of your repayment term and even a reduction in your monthly payment obligations. After you have negotiated the terms of your debt management plan, you will enter into a formal agreement with your creditors.
