About debt management

Debt management is a process by which consumers schedule repayment of outstanding debt that has accumulated and proven to be too much to pay back in a timely manner.

Consumers in this situation have a handful of options in order to get handle on their debt and properly manage the repayment of this debt:

• Self-help by setting a strict, but realistic, budget
• Credit counseling
• Debt consolidation
• Debt negotiation
• Bankruptcy

One step to take when debt gets out of hand is for a consumer to contact creditors directly. Most creditors will help a consumer set up a repayment plan. This can be a much better option than waiting for the creditor to send the bill collector to your doorstep. For debt that is secured, tied to an asset like a home or a car, creditors may take that asset back, such as foreclose on a home or repossess a car.

Credit counseling is another step consumers can take, as the counselors work with consumers to resolve the credit issues. A credit counselor may put a consumer on a credit counseling plan. In this case, the consumer deposits funds each month with the credit counseling organization, which, in turn, pays down the consumer’s debts on an agreed-upon schedule. A debt management plan could take at least two years to complete.

Although there are many reputable and affordable credit counseling organizations, with certified counselors, consumers should be aware that not everyone who advertises credit counseling is reputable. These counselors are under no obligation to operate free of charge or to charge affordable fees. Therefore, choosing to work with this type of credit counseling agency can simply add to a consumer’s debt.

Home equity debt consolidation is the process of securing a second mortgage or equity line of credit, secured with a consumer’s home, to pay off other debts – secured or unsecured.

Consolidating debt this way has pluses and minuses. One plus is the ability for consumers to deduct interest expense from their tax obligations. One minus is that your debt is now mored tied up in your home.

About debt consolidation

Debt consolidation services can help a consumer out of a tight spot, but they are not the right option for everyone.

For consumers who do not own a home, owe significantly more money than they earn, or who are unable to refrain from spending and accruing new debt, options such as contacting creditors directly and setting up payment plans, working with a certified credit counseling services, or even considering more drastic changes may be better options.

For consumers who own homes and are considering debt consolidation as a way out from under a debt, there are some things to think about. For one thing, consumers who own a home often can consolidate debt this way on their own – by getting a loan from the bank.

If bad credit or the amount of outstanding debt makes this unrealistic, then some consumers will work with agencies to help them consolidate debt.

Some questions to ask about debt consolidation:

• What fees or points will be charged, in addition to the interest on the consolidated loan?
• Is it best to work directly with the bank to consolidate loans?
• Is the service or professional licensed?
• Is the service forthcoming with information about itself?
• Have complaints have been filed with agencies like state banking regulators, the Federal Trade Commission, or better business bureaus?
• How have complaints been resolved?
• Does the service or professional spend time with the consumer and review the financial situation before making any recommendations?
• Does the service work with the consumers creditors to make sure they will accept payment this way?
• Does the service or professional offer advice about budgeting and debt management?
Does the service require payment up front?

Options for self-help debt consolidation

For some consumers, getting out of debt will be something they can do on their own. This option might be best for individuals who are deep in debt due to temporary unemployment or an unexpected, and large, one-time expense. As long as they don’t continue to add to their overall debt, these consumers can often manage the repayment of debt on their own.

The first step in managing debt is to understand how much money comes in – as income in whatever form – and how much goes out, as expenses like rent, insurance premiums, eating out, and buying things like clothes or books.

Some expenses, like paying utility bills, are necessary, and others, such as going to the movies every Friday night, are not necessary. A budget is a simply matter of prioritizing those expenses, cutting down the unnecessary expenses, and using the money saved to pay down the debts. It is simple to explain a budget process, but not simple to execute for most consumers.

Once an individual creates a reasonable budget, and knows how much of the budget can go to repaying the debt, there are a couple of options – working with creditors to set up repayment programs or consolidating debt through a loan or line of credit.

If much of the debt is high interest, non-secured debt like that owed to credit card companies, consolidating debt through a home equity loan may be a good idea – it can reduce interest and provide tax benefits.

Is self-help debt repayment a good choice?

When comparing debt consolidation options, consumers should almost always consider the option of helping themselves. Self help is not always the best choice for all consumers, but it can be a wise choice for those with enough willpower, time, and energy.

Resolving credit problems alone is often best for individuals who are deep in debt due to temporary unemployment or unexpected, and large, one-time expense. As long as they don’t continue to add to their debt, these consumers can often manage the repayment of debt on their own.

The first step in deciding whether or not to do this on one’s own is to understand both the current financial situation and how it happened. Then it is important to do a detailed, and sometimes painful, analysis of income and expenses, to create a realistic budget and repayment plan.

Questions to ask oneself when considering whether or not to repair credit without the services of a professional:

• What free educational information is available to help me through the process? Will I read it?
• It is important for me to save fees or keep financial information private?
• Are there free services I can call or search online for advice or help if I get stuck? Am I comfortable asking for that help?
• Am I comfortable contacting creditors and asking for repayment plans or reductions of debt or fees?
• Am I comfortable holding myself, and my family, to a strict budget?
• Will I be diligent about making monthly payments?
• Will I be diligent about not adding new debts to the situation?

Debt management plans explained

A debt management plan is something a credit counselor may recommend for certain consumers. This plan is a way for consumers to pay off debt on a specific payment schedule over a minimum of two years. In a debt management plan, the consumer deposits money with the credit counseling agency each month.

A payment schedule is set up and according to that plan the money is used to pay unsecured debt, like credit cards or medical bills. As part of a credit counseling program, some consumers or their counselors may be able to get creditors to lower interest rates or reduce fees.

Before signing up for such a program, it is critical to research the credit counseling agency, understand how the fee structure and payments work – if every dollar deposited is used for debt repayment, for example, and feel confident with the people and the agencies.

Neither credit counseling agencies nor debt management plans are regulated by the government, so it is important for consumers to do some basic research.

To find a credit counseling agency, who may recommend a debt management plan, consumers should check with local universities, credit unions, housing authorities, and military bases, which often offer nonprofit credit counseling programs. Or check with banks and consumer protection agencies for recommendations of reputable services in a particular area.

Choosing a debt management program

For some consumers, working with a debt management program may be the best way to resolve financial problems. A debt management plan is something a credit counselor may recommend for certain consumers – a way for consumers to pay off debt on a specific payment schedule over a minimum of two years.

Debt management plans are offered through credit counseling agencies, so it is important to choose a reputable one. Research the credit counseling agency, understand how the fee structure and payments work – if every dollar deposited is used for debt repayment, for example – and make sure that you feel confident with the people and the agency.

Ask to speak to current or previous customers to find out about their experience. Neither credit counseling agencies nor debt management plans are regulated by the government, so it is important for consumers to do some basic research.

To find a credit counseling agency who may recommend a debt management plan, consumers should check with local universities, credit unions, housing authorities, and military bases, which often offer nonprofit credit counseling programs. Another place to check is with banks and consumer protection agencies for recommendations of reputable services in a particular area.

Working with a debt professional

When a consumer reaches out to someone for assistance with debt consolidation options, it can feel awkward. Most people aren’t used to sharing details of their financial lives with someone else.

So it is very important for a consumer to feel comfortable with the debt consolidation service and its professionals. It is also important to do some due diligence to make sure the service or professionals are licensed, legitimate, and charge reasonable and acceptable fees.

There are many certified, legitimate services and professionals, but there are also services that attempt to take advantage of people in financial dstress. Some services can charge very high fees or even offer services for a fee that consumers can get on their own for free.

Whether working with a credit counselor, debt negotiator, or debt consolidator there are some basic research consumers should do before paying any money or sharing personal financial details.

First, find out what types of services an organization or professional offers, including helping with financial planning for the future, what educational materials they can share for free, and what type of fees they charge, how they assess them, and get a detailed quote for specific services.

Find out if the company will work with consumers who cannot afford to pay for the services. Research if the company or individual is licensed by the state, and have other qualifications like accreditation by a reputable third-party organization.

Looking into these types of questions will steer a consumer to a reputable service, who will help straighten out the financial troubles, not add to them.

Protecting yourself when dealing with debt issues

Other than self-help options, all debt management programs – credit counseling, debt negotiation, and debt consolidation – require that a consumer divulge personal financial information to a third party. This is why it is important for the consumer to understand:

• What services are offered and what aren’t
• What fees and expenses are charged, why, and where the funds go
• Who the financial professional or organization is, including information about education and certifications
• What federal, state, and local agencies have to say about the credit program.

To find a reputable agency, and reputable debt consolidation advice, consumers should check with local banks or consumer protection agencies for advice. Or check with local universities, credit unions, housing authorities, or military bases – sometimes they have debt management and credit counseling services and if not, they can often recommend one.

Consumers should stay away from debt management agencies or professionals that:

• Charge high up-front or monthly fees just for signing up
• Pressure consumers to make "voluntary contributions," which are really just disguised fees
• Won’t provide free information about the service or require personal financial information to do so
• Don’t spend time reviewing a consumer’s financial situation before making recommendations
• Fail to teach consumers money management and budget skills.

Credit counseling explained

After a thorough review of their finances, some consumers may decide that they need help managing their debt or working with a budget. For these consumers, working with a credit counselor may be the best way to resolve these financial problems.

Some counselors offer online or telephone services, but many still offer in person services as well. There are many certified, legitimate credit card counseling services out there, but there are also services that unfortunately prey on people in financial trouble and/or charge very high fees to those already in financial distress.

When working with a credit counselor there is some basic research consumers should do before paying any money or sharing personal financial details.

Universities, credit unions, housing authorities, and military bases are examples of organizations that offer nonprofit credit counseling programs. Banks and consumer protection agencies an also offer recommendations of reputable services in a particular area.

Some questions to ask, or think about, before working with a credit counselor:

• Is the service or professional licensed?
• Is the service forthcoming with information about itself?
• Have complaints have been filed with agencies like state banking regulators, the Federal Trade Commission, or better business bureaus?
• How have complaints been resolved?
• Does the service or professional spend time with the consumer and review the financial situation before making any recommendations?
• Does the service work with the consumer’s creditors?
• Does the service or professional offer advice about budgeting and debt management?
• Does the service require payment up front?

Choosing a credit counselor

For some consumers, credit counseling may be the best way to resolve financial problems. Here are some things to look for when choosing a credit counselor.

There are many certified, legitimate credit counselors that exist to help consumers, but there are also services to provide little help, charge very high fees, and sometimes even offer services for a fee that consumers can get on their own for free.

When you compare debt consolidation services, consider working with a counselor, but do some preliminary research before paying any money or sharing personal financial details.

Universities, credit unions, housing authorities, and military bases are examples of organizations that may offer nonprofit credit counseling programs. Banks and consumer protection agencies can also offer recommendations of reputable services in a particular area.

Some basic questions to ask:

• What services are offered?
• What free educational information is offered for free?
• What are the fees and what if I can’t afford them?
• Is there a formal contract or agreement for services?
• Is the service or professional licensed to operate in the state?
• What are the qualifications and educational background of the counselors?
• Are the counselors certified or accredited by a non-affiliated third party?