Debt is the money you have to repay to the creditors – who are the people who have lent you the money.
It can be paid out in small portions upon an agreement with creditors. There are few institutions or credit counselling agencies which help you in handling this repayment process by suggesting Debt Management Plans (DMP).
A debt management plan (DMP) is a process by which your debt is managed in an efficient way in order to relieve you from it. It is more like an informal agreement between you and your creditor on how you pay back your debt in terms of realistic installments.
If your debt is not managed at the early stage you might end up paying more interests or releasing your assets to your creditors. The counselors do a thorough analysis of your financial situation and also suggest ways to bring in cash flows. This cash could be used for solving your debt problem.
What is a debt management plan for an individual debtor?
Instead of getting worried about your ability to handle your debt closures, you can contact a credit counselling agency. Based on the type of debt you have got, the counselor would guide you in the right way.
Service provided by a counselor is
Analyze the current financial situation
Suggest how to increase the cash flow.
Suggest where you can reduce your expense
Prepare a likely budget for you
Repay the debt in an appropriate way from the cash flow created.
Finally to relieve you from the debt.
Please enquire clearly on the service provided because not all counselors perform all the above functions.
If you have too many loans, you might be asked to avail a bigger a loan to close the smaller debts. Once the minimum payment is done for all the debts, first priority is given to the debt with the highest rate. Once it is closed, it would bring in some cash flow which could be used for repaying the other loans.
When you enroll to a credit counselling agency, these steps would be done by the counselor on behalf of you. You will be asked to pay for this service and also enrollment fee. This is usually at an affordable range. But DMP also has its own pitfalls. Before enrolling a keen analysis would be required from your end too.
You can get a sense of relief once you register for a DMP since both money and debt are managed as per your financial situation.
It is more like an informal agreement between you and your creditor which frees you from formal procedures like IVA and Bankruptcy.
DMP would suspend action against you in county court judgements.
All you have to do is make a single monthly payment to the agency.
There is no confusion about which debt is to be closed first or any kind of debt managing decisions. Everything is handled by the credit counseling agency.
Creditors will freeze your interest rates.
It could reduce your monthly debt installment.
DMP are affordable. Many agencies might not charge for their service too.
Since the agreements are informal, there is no strict rule to be followed. The creditors might not stick on to the DMP.
Monthly debt repayment amount might be reduced. But when you see the whole picture, you would be repaying the loan for a longer duration hence paying more.
Your credit rating still doesn’t show any positive change for you.
In case you have huge debts, you might not end up debt free but would be repaying your debt for a longer period.
How Does Debt Management Work?
It is very easy to understand how debt management works. Debt management can be done appropriately by performing the following steps. Each step would need your honest answers about your financial status. In case of doubt please get the right answers before entering the in the debt management plan template.
Analyze your monthly income: There are readymade templates available which would need the details of your total monthly incomes. It could be a summation of yours, your spouse’s income and extra benefits that you receive. Thus you get the exact figure of total money on hand.
Analyze and restructure your monthly expenditures: Once you have income details now you need to analyze your expenditures.
Make a list of essential bills which includes mortgage/rent, gas, TV license, electricity, water charges and cost of living which includes expenses on housekeeping, travel, pocket money or school trips, gyms, car maintenance etc.
Now find out the amount remaining after paying all your expenses. This amount is the actual figure that can be used to repay your debts.
Analyze priority debt: In case you have failed to pay an essential bill, it would add up as arrears to the monthly payments. Such debts are given the first priority since it would lead to greater damage in a long run. Such debts are called priority debts.In the worst case scenario you might get the essential services disconnected or even lose your home.
Analyze non priority debt: Debts such as credit card, payday loan, money borrowed from friends etc. can be given lesser priority compared to the essential bills.Make a list of such debts too.
Make a conclusion on your financial status: Once you get all the above details you get to know your financial status. Make a report out of it which gives your financial conclusion. This needs to be done atleast once every 3 monthsto find out how much your financial status is been changed.
Contact the creditors with your financial status: Finally contact your creditors with this financial conclusion. Do keep them informed about your financial status too. This could aid in debt management and easy completion of your debt.
The above steps can be performed by an individual to help him understand the shortcomings of his financial conditions and to take the right step to improve cash flow.
Few successful strategies of debt managements are as follows
Debt Consolidation program
When you are under the pressure of paying back too many debts at high rates, an ideal way of dealing it would be consolidating all your debts and fix it by means of a big loan. This way you can close most of your high rate loans. This is termed as Debt Consolidation Program.
Suze Orman Plan
As per Suze Orman plan, there are 5 simple steps to achieve a debt free life.
Close your credit card debt: Everyone would have a credit card debt which is eating away a major chunk of your income. The first step would be to pay the current minimum credit card debts. Then close the debt for the credit card with the highest rate. Do the same keeping the highest interest rate card as priority.
Increase your FICO score: This is been created by a company named Fair Isaac Corporation. Higher the credit score, lower would be the interest rate. Thus increasing the cash in the account.
To increase your credit score, Suze suggests you to first close your credit card bills, secondly by paying your bills on time would almost give a 35 percent increase in fico score and thirdly never cross your credit limit. Also you need to remember not to close down a credit card as it would affect your credit score.
Analyze your expenses:If you are a spendthrift, then analyze your spending action and categorize your expenditure under two broad sections – Wants and Needs. Then eliminate the Wants if you have debts or no savings.
Work on savings plan: Once the debts are closed, our next action plan should be saving. As per Suze plan’s you need to save enough for eight months expense. Then also try to save 20% more than what you have planned to save initially. Next you have to look for a savings plan with highest rate of interest and put savings in that. This way your savings will grow more over a period of time.
Work on retirement plan: This is the most important action that needs to done. Post retirement your health might not favor strenuous jobs. Start investing in a good retirement plan at an early age when you are in a position to work hard in order to see fruitful results.Also never panic when the market goes down. All you have to do is stay calm and wait for the favorable change in the market.
Debt Reduction Plan
This is similar to debt consolidation program. The ultimate goal of this plan is to reduce your debt payments and increase cash flows to pay back your debts. The debts are consolidated together and paid back in terms of a single payment per month. To increase the cash flow you have to plan on a strategic spending plan. Spending on unwanted things can be stopped. This would increase your cash flow in the account.
Few tips to reduce unwanted expenses:
You can try to reduce your outing plans once a week and avoid frequent outings.
You can reduce the expenses on movie outings by watching cinemas using rented cds or online options.
Be alert when you come across offers like Buy now, Pay later. Such offers usually have hidden payments which could hamper your savings plan.
This is one more method of increasing your cash flow and reducing your debts with that money. Budgeting means planning how to use your money effectively to have a debt free and stress free life. It includes few critical steps
Take time to organize your bills: This way you can have a clear picture of your essentials payments and extra payments.
Consolidate your monthly income: Get to know the exact cash you have for your expense and debt payments. Make sure you also include your benefits even if it’s weekly, monthly or yearly.
Analyze your spending action: Basic classification of essential and living costs need to be done. Essential costs cannot to be avoided since it might cause a bigger problem later. But it can be carefully altered as per our utilization to ensure maximum advantages with those plans. Living cost can be rigorously changed; few expenses can be avoided too to get more cash flow.
Take a look at the money that can be saved: The money remaining from the income after all the expenses is the cash that could be saved. Try to save it or close your debt payments.
When you decide on a budget plan follow it honestly: Once you have fixed a budget plan based on the income, expense and debts, make sure you follow it strictly to achieve the complete advantage.
The budget plan needs analysis on a regular interval since there might be chances of increase in income or more cash flow due to closure of a debt. The money needs to be planned again correctly as per your current financial status.
All the above plans can be done by a credit counseling agency. You need to be alert while choosing a counseling agency. For your ease a nation-wide organization called National Foundation for Credit Counseling, Inc (NFCC) has been set up. This provides certification to the counselors, educational support to upgrade the counselor’s knowledge as per the current market trend.
It elaborates on the standards of conduct for it member agencies. You need to make sure the credit counseling agency is enrolled in NFCC for your financial security reasons.
What to do if you fail your debt management plan?
If you have failed completing your DMP then you might have to file for bankruptcy. DMP’s main motive is to protect you from bankruptcy. But if the spending and saving plans are not followed righteously, then it would hit you bad in the debt management plan. A late or missed payment or not paying the debt installments would cause a failure in the DMP. Only end to such situations is bankruptcy. A credit counseling company will be able to help you if your financial situations or emergencies are explained on time.