Debt settlement is an increasingly popular way of getting out of credit card debt, offering a less expensive, relatively quick way for you to regain control of your financial future. Your credit cards are combined into one easier-to-manage monthly payment, with a lower interest rate for easy payment,
This practice is handled by a professional debt negotiator, as they have established relationships with creditors to get the most favorable settlement offer for their clients.
Unlike other ways to get out of debt, the principal sums are not typically tackled, and normally only the interest rates are negotiated. Debt management solutions tend to have payment schedules of 3-5 years, which is better than having to pay credit card minimums indefinitely.
How is a debt management plan created?
The first order of business will be for you and your debt advisor to account for your household’s monthly income and expenses. Basic living expenses such as rent, utilities, food, transportation, and unsecured loans (these include mortgages and typically could not be included in the debt management plan) are taken into consideration. This is then compared to your current sources of income. If you have any cash left after paying for all the other expenses, the remaining amount will be divided among your creditors.
A plan to optimize your expenditures may also be made so that you actually have something to pay out.
Next, your debt advisor will set up a specialized bank account, to which you’re to make a deposit of a specified amount every month for the duration of your DMP. The funds deposited into your account each month is then used to pay your creditors the negotiated amount your account settles for.
Lastly, your debt advisor may collect a fee off the amount deposited. Debt advisors accredited by the American Fair Credit Council can’t charge you upfront before they’ve actually delivered a result, so steer clear of any debt settlement companies that charge upfront fees.
Benefits of DMPs
Debt management is a popular strategy for taking on credit card debt thanks to the following benefits:
- Easy monthly payments.
- You only need to track one bill instead of several different credit card bills
- Debt collectors will be less likely to harass you.
- Your credit score can improve if you faithfully keep up with payments.
Drawbacks of DMP’s
While DMP’s offer a simple, relatively fast way to climb out of credit card debt, they have several drawbacks:
- You cannot use credit cards while enrolled in a program.
- Unexpected life circumstances may compromise your ability to stay enrolled.
- DMP’s are great for credit card debt, but they’re not applicable to taxes, secured loans such as mortgages, medical debts, and student debts.
- Failure to meet one payment may cause penalties.
Debt management plans are not for everyone. If you’re used to paying for things with a credit card rather than in cash, following a DMP can be a huge challenge, especially over the period of 3-5 years. However, if you have a healthy cash flow, it may not only be a viable strategy for getting out of credit card debt, but a way to further improve your credit score a few years down the road.