Expert debt negotiators often carry out debt negotiation on behalf of their clients, however, individuals may need to acquire the debt negotiation for themselves.
What is debt management?
Debt management is simply a method to get your debt under better control through financial planning and budgeting. Its primary objectives is usually to set up and utilize proven strategies to help you lower your current debt and move toward eliminating it completely.
It often involve creating a debt management plan that fits in with your specific budget and financial situation.
Debt management plan is an agreement between a debtor and a creditor that addresses the terms of an outstanding debt. This commonly refers to a personal finance process of individuals addressing high consumer debt.
How does debt management work?
Plans for debt management are meant to address unsecured debts like credit cards and personal loans. Debt management can be done in variety of ways.
Everyone who is indebted needs to manage their debt, when this is not done, debtors often feel overwhelmed and worn out by debt. If you feel like you definitely need help with your debt, then a debt management plan might be the solution and of immense help to you.
This debt payoff tool puts you on a path to pay off your debts- typically from credit cards- over three to five years. With a DMP, several debts are rolled into one monthly payment and creditors reduce your interest rate. In exchange, you agree to a payment plan that usually runs three to five years. Note that interest rate cuts are standardized across credit counseling agencies, based on your creditors’ guidelines and your budget.
Evaluate and decide if a debt management plan is right for you.
Debt Management Plans are frankly not for everyone and while debt management are invaluable for releasing debts, it is also not a fail-proof approach. For debt management to work, you will need to have enough income to cover your existing bills.
Depending on the agency, only 10% to 20% of clients end up using this debt relief option. Of those who do, about 50% to 70% complete the plan, depending on the year and how the agency reports completions.
Below is a quick checklist to help you with this decision.
- Are your unsecured debt, such as from credit cards, is between 15% and 39% of your annual income.
- Do you have a steady income and think you could pay off your debt within five years if you had a lower interest rate.
- You can get by without opening new lines of credit while on the plan.
Step by Step debt settlement
Know Exactly How Much You Owe
Compile your debts, including the creditor, total amount of the debt, monthly payment, interest rate, and due date. You can use your credit report to confirm the debts on your list. Having all the debts in front of you will allow you to see the bigger picture and stay aware of your complete debt picture. Debt reduction software can make this process easier.
Once you have a handle on your debt and your income, you can calculate your Debt to Income ratio (DTI). This ratio tells you how much of your income is going toward debt payments. To find yours, divide your debt payments by your income, and multiply by 100. For example, $1,200 of monthly debt divided by $3,000 of monthly income is 0.4 x 100 = 40%. The lower this number is, the better, and tracking it can help you understand your finances more clearly.
Pay Your Bills on Time Each Month
Late payments make it harder to pay off your debt since you’ll have to pay a late fee for every payment you miss. If you miss two payments in a row, your interest rate and finance charges will increase.
If you use a calendaring system on your computer or smartphone, enter your payments there and set an alert to remind you several days before your payment is due. If you miss a payment, don’t wait until the next due date to send your payment, by then it could be reported to a credit bureau. Instead, send your payment as soon as you remember that it was missed.
A budget can help you stay out of debt, and it can help you climb out. It allows you to see how much money you earn and where that money is going. Create a bare-bones budget that allows you to pay for necessities like your rent or mortgage and utilities. Set aside everything else to pay off your debt as quickly as possible.
Create a Monthly Bill Payment Calendar
Use a bill payment calendar to help you figure out which bills to pay with which paycheck. On your calendar, write each bill’s payment amount next to the due date. Then, fill in the date of each paycheck. If you get paid on the same days every month—the 1st and 15th—you can use the same calendar from month to month. But, if your paychecks fall on different days of the month, you’ll need to create a calendar every month.
Make at Least the Minimum Payment
If you can’t afford to pay anything more, at least make the minimum payment. Of course, the minimum payment doesn’t help you make real progress in paying off your debt. But, it keeps your account in good standing, which avoids late fees. When you miss payments, it becomes harder to catch up and eventually your accounts could go into default.
Decide Which Debts to Pay Off First
Paying off credit card debt first is often the best strategy because credit cards have higher interest rates than other debts.1 Of all your credit cards, the one with the highest interest rate usually gets priority on repayment because it’s costing the most money.
Use your debt list to prioritize and rank your debts in the order you want to pay them off. You can also choose to pay off the debt with the lowest balance first. This might cost a little more in the long run, but knocking off small debts first can build confidence.
Pay Off Collections and Charge-Offs
You can only pay as much on your debt as you can afford. When you have limited funds for repaying debt, focus on keeping your other accounts in good standing. Don’t sacrifice your positive accounts for those that have already affected your credit. Instead, pay those past due accounts when you can afford to do it.
Build an Emergency Fund to Fall Back On
Without access to savings, you’d have to go into debt to cover an emergency expense. Even a small emergency fund will cover little expenses that come up every once in a while.
First, work toward creating a small emergency fund—$1,000 is a good place to start. Once you have that, make it your goal to create a bigger fund, like $2,000. Eventually, you want to build up a reserve of three to six months of living expenses.
Step I: Find out if you are even a good candidate
Answer these questions to decide whether DIY debt settlement is a good option:
Have you considered bankruptcy or credit counseling? Both can resolve debt with less risk, faster recovery and more reliable results than debt settlement.
Are your debts already delinquent? Many creditors will not consider settlement until your debts are at least 90 days delinquent. You will have a better chance of settling a debt with the original creditor that is around five months delinquent, which is around the time many creditors will sell the debt to a third-party debt collector.
Do you have the money to settle? Some creditors will want a lump-sum payment, while others will accept payment plans. Regardless, you need to have the cash to back up any settlement agreement.
Do you believe in your ability to negotiate? Confidence is key to DIY debt settlement. If you believe you can, you probably can. If your confidence is wavering, DIY debt settlement may not be the best route for you.
Step II: Know your terms
You need to negotiate two things: how much you can pay and how it’ll be reported on your credit reports.
For payment, you may be able to settle your debts for 40% to 50% of what you originally owed.
While you’re technically working to settle your debt as a percentage of what you owed, also think about how much you can pay as a concrete dollar amount. Comb through your budget and determine what that figure is. Note that you may have to pay taxes on the portion of debt that’s forgiven if the amount is $600 or more.
As for your credit, it’s probably been wrecked by delinquent marks from missed payments by the time you’re eligible to settle. But you may be able to slightly redeem yourself by clarifying how the settled debt is noted on your credit reports.
Settled debts are generally marked as “Settled” or “Paid Settled,” which doesn’t look great on credit reports. Instead, you’ll try to get your creditor to mark the settled account “Paid as Agreed” to minimize the damage.
Step III: Reach out (to your creditor, of course!)
Dealing with your creditor will require persistence and persuasion. This is a crucial moment in the settlement process.
You may be able to resolve the settlement in one go, or it might take a few calls to find an agreement that works for both you and your creditor. If you don’t have luck with one representative, try calling again to get someone more accommodating. Try asking for a manager if you’re not making any progress with frontline phone representatives.
Approach the call with a clear narrative. Concisely portraying the financial hardship that made you unable to pay your bills can make the creditor more sympathetic to your case.
Don’t lose sight of the amount you can realistically pay. Start by lowballing, and try to work toward a middle ground. If you know you can only pay 50% of your original debt, try offering around 30%. Avoid agreeing to pay an amount you can’t afford.
Success can vary depending on the creditor. Some are open to settling, others aren’t. If you’re not making any progress, it may be time to reconsider other debt relief options, like Chapter 7 bankruptcy or a debt management plan.
Step IV: Finalize the deal
Before making any payment, get the terms of the settlement and credit reporting in writing from your creditor.
A written agreement holds both parties accountable. They have to honor the agreement, but if you miss a payment, the creditor can retract the settlement agreement, and you’ll be back where you started.
“Debt settlement is about commitment. If you miss a payment, it’s over,” says. “Say you have a 12-month settlement plan. You pay the first six months, but if you miss month seven, they take the past six months (of payments) then put it toward your full balance.”
Alternatives to a debt management plan
DMPs are not always the best route for debt relief. Problem debt from student loans and medical bills will generally not be covered under such plans.
Other options that exist include;
- If your problem debt is less than 15% of your annual income, you could take a DIY approach using the debt avalanche or debt snowball method.
- A debt consolidation loan, if you have good enough credit to qualify, can also gather debts into one at a lower interest rate. You have control over how long the loan is and retain your ability to open new credit lines.
- Bankruptcy may be better if your debt is more than 40% of your annual income and you see no way to pay it off within five years. This debt relief tool can quickly give you a fresh start, and consumers’ credit scores can start to rebound in as little as six months.
- Balance transfer credit cards: Balance transfer cards can offer you the ability to move your debt to a zero percent introductory interest card. This will give you the option to pay off your debt without having to worry about interest. Note that balance transfer cards have attached fees, including a fee for each balance transfer in most cases. If you are not moving your balance to a preapproved card, you may have to deal with a hard inquiry into your credit report. Balance transfer cards are available if your credit score is in the good-to-excellent range, but may not be available if your score is in a lower range. You’ll also need to have a clear plan for repaying your debt before the zero percent interest period ends, because then you’ll be subject to the regular variable APR on any remaining balance.
- Personal loans: Personal loans give you the chance to receive a lump sum of money that can pay off your debt all at once. A personal loan is a good option if you know that you will need more time to get your debt under control. Personal loans will offer a repayment period that typically ranges from two to seven years. Unlike a credit card, you will have to repay your personal loan by the end of the specified time period.
- Your interest rate for a personal loan will depend on your credit score. Interest rates for personal loans can range from 5 to 36 percent, so make sure that the rate you receive is lower than the rate you are currently paying on your outstanding debt. Bank rate has a tool that can estimate your interest rate for some of the top personal loans on the market.
How does debt management affect credit score?
DMPs have some negative effects on your credit score. They are outlined and briefly discussed below
Inquiries
For instance, if you are attempting to get a lower interest rate, you may trigger a hard inquiry into your credit report. Hard inquiries stay on your credit report for two years and can impact your credit score for one year.
Missed payments
While consistent payments will have a positive effect on payment history, missing payments will cause your credit score to lower significantly. If you, or your credit counselor, are using a tactic of withholding payment from your creditor to get a better rate, expect your credit score to go down.
Credit utilization
Another key factor in the health of your credit score is your credit utilization. This factor makes up 30 percent of how your score is calculated and is linked to how much debt you carry compared to how much credit you have available. The ideal credit utilization is between 10 and 30 percent. This means that your debt should equal no more than 30 percent of your available credit across all accounts.
Having all of your debt consolidated into one bill can be beneficial for paying things off. However, if you close some of your accounts, you’ll affect your credit mix, which makes up 10 percent of your credit score, and your credit history, which accounts for 15 percent.