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Do you feel like your debt is sailing into the center of a violent ocean storm? Does your spouse know how bad things are? Do you know how bad things are? Are you worried your may run your family aground?
What are your options? Who can help? How do you get started?
Let’s get started with some terms and resources available to you today.
And some words of encouragement. If you’re asking this question it may not be too late.
What Is a Debt Management Plan?
A debt management plan is a program you enroll in where a separate company works with creditors on your behalf to negotiate interest rates and new monthly payments. Typically, these programs are structured to last roughly three to five years with the goal of paying off consumer debt entirely.
You might be thinking: Okay, I’m with you so far. But what kind of debt are we talking about here?
Glad you asked because your specific debt might not even be eligible under many plans. If you have an outstanding secured loan like a fixed-rate mortgage, auto loan or any other loan that’s tied to physical property, it won’t qualify for a DMP.
Debt management plans only work with unsecured loans. What are unsecured loans? Basically, unsecured loans are those with no collateral attached to them. Here are a few examples:
- Credit card debt
- Personal loans
- Payday loans
- Income taxes
Other Debt Management Alternatives to Avoid
Debt Settlement
Unlike a debt management plan that puts you on a payment plan to pay off 100% of your loans in full, debt settlement is when you negotiate with your creditors to pay them less than the total balance of what you owe.
But debt settlement can be an extremely lengthy process, and it can end up becoming extra costly. Some companies ask for a fee that can climb as high as 15–25% of the total debt you’re settling. Say you owe $20,000 in consumer debt. That means you could pay an additional $3,000 to $5,000 just to settle!
And if you think you can just plunge into a debt settlement plan right away, think again. Consumers only qualify if they have a history of missing payments. If you’re on top of your monthly payments but face a long repayment period, debt settlement is never going to be in the cards for you.
Debt Consolidation
Debt consolidation might seem like a good idea on the surface. After all, staring down just one loan versus a handful can be tempting to consider. But also consider that when you consolidate your debt, you’re accepting a refinanced loan with extended repayment terms. Usually these loans are secured against some fixed assets, which are things purchased for long-term use like real estate, equipment or vehicles.
If you think taking out a loan to settle your other loans seems a little, well, backwards, I couldn’t agree more. Plus, putting up collateral just to refinance means that if you start missing payments, you could lose your home or car!
And in almost every case of debt consolidation, negotiating a lower interest rate means a longer repayment period. That means you’ll be in debt longer than you would’ve been before you consolidated.
Debt Snowball Method
Now for the moment you’ve been patiently waiting for. This is where we reveal the secret to getting out of debt once and for all. Are you ready for it? Are you listening? Pay off your debts like millions of people have by using the debt snowball method:
- Step 1: List your debts smallest to largest, regardless of interest rate. Pay minimum payments on everything but the smallest one.
- Step 2: Attack the smallest debt with a vengeance. Once that debt is gone, take that payment (and any extra money you can squeeze out of the budget) and apply it to the second-smallest debt while continuing to make minimum payments on the rest.
- Step 3: Once that debt is gone, take its payment and apply it to the next-smallest debt. The more you pay off, the more your freed-up money grows and gets thrown into the next debt—like a snowball rolling downhill.
Repeat this method as you plow your way through debt. The more you pay off, the more your freed-up money grows.
That’s it. The only thing standing in the way of you and a debt-free life is the choice to change your behavior and attack your debt head on. It won’t happen overnight, but nearly 6 million people have taken control of their finances by going through Financial Peace University. Get the tools you need to pay off all your debt, save for emergencies, invest, and even build wealth.
Dave Ramsey, author of the The Total Money Makeover said, “We buy things we don’t need with money we don’t have to impress people we don’t like.”
Suze Orman, author of the Ultimate Retirement Guide for 50+, once said, “Woman fake orgasms and men fake finances.”
Now I can’t say I know anything about the former but I know all about the latter.
When paying off debt and working to stay out of it, families can set goals and pursue them together. Talking transparently with kids and creating a budget with your partner will keep everyone on board and invested in debt freedom — and it can encourage kids to make smart money choices of their own.
Disadvantages of a Debt Management Plan?
The process might seem simple. You may be saying, I get a lower interest rate and someone else handles my debt. What more do I need to know? Well, there are a few things. Let’s look a little deeper into what to expect from a debt management plan from the get-go.
1. Expect to Work With a Middleman
Put simply, when you enroll in a DMP, you enlist a credit counseling agency to serve as a middleman between you and your creditors. Once hired, they’ll attempt to negotiate lower interest rates and more competitive repayment plans on your behalf. But what’s the biggest thing they don’t want you to know? You’re more than capable of doing this by yourself. All you have to do is pick up the phone and call your creditors.
You may be surprised to find that your creditors are willing to work with you on a revised repayment plan to avoid bankruptcy. Think about it: They want their money.
You’re buried underneath a mountain of credit card bills that seems to grow to new heights each month. You’re upside down on your car payment just one year into tackling your auto loan. Your payday loans have ballooned, and the interest is cooking like a shish kebab on an open flame.
If you’re facing one or—heaven forbid—all of the scenarios described above, you may be considering your options for immediate relief, which might include a debt management plan (DMP).
2. Beware of Hidden, Up-Front and Monthly Maintenance Fees
Unfortunately for consumers, most credit counseling agencies charge an up-front fee just to start working with them. And on top of that, you can expect monthly maintenance fees to start rolling in just for the courtesy of doing business. So even though you may be sending lower monthly payments to your creditors, there’s a chance it’ll be offset by other hidden fees your new “business partner” might not be so transparent about.
3. Expect Fewer Breaks
At this point, you might be wondering: So what happens if I miss a payment while I’m in the program? That’s an excellent question! Unfortunately, if you miss just one payment, you could lose the progress you’ve made toward paying down your debts since you rolled everything into a debt management plan. You also might see your credit score drop as a result. Worth the risk? That’s up to you.
4. Have Less Control of Your Finances
Ultimately, when you sign up for a debt management plan, you allow someone else to take control of your finances. Here’s perhaps the most dangerous thing about DMPs that’s invisible to most people: They do nothing to change spending behavior. If you want to take control of your money, personal finance is 80% behavior and only 20% knowledge. Oftentimes, when people consult credit counseling agencies, they slip further and further into debt because agencies don’t directly solve any problems for the individual.
If you want to get out of debt, you have to own up to your previous mistakes with money and resolve to change for the better. Only then will you be able to kick that debt to the curb altogether.
Analyze spending and look for ways to cut back
With your partner, create a spending plan, which will give you insight into current spending and help you free up money for paying down credit card debt.
Identify how much you’re currently putting toward the three buckets of needs, wants and savings and debt repayment.
To do so, make a list of your fixed expenses, like housing, minimum debt payments, insurance and utilities. Then comb through recent credit card or bank statements and come up with an average that you spend on entertainment, meals out and other items that vary month to month.
Can you save money on needs or wants to boost debt repayment, perhaps by reducing your cable package or shopping for cheaper car insurance? Going forward, come up with a percentage of earnings you’ll send to each category.
For me and my wife we were going out to eat far too much. We were just bored and eating like we were royalty.
No we’d rather just eat at home and safe the money
A worksheet like this one from the CFPB can help start the conversation
Your children don’t need to know your precise bank account or credit card balances. But show them how you’re categorizing your spending, and let them know when you’ve been able to reduce expenses or pay extra toward your credit card bill so you can celebrate wins together.
Great for teenagers to see before they go off to college. I wish High School required this type of education as a requirement of graduation.
How families can better manage debt this year
You may not talk about it with your friends or extended family, but you’re not the only family focused on getting out of debt. In fact, 85% of adults in the U.S. say they’re actively working to reduce their debt, according to a January 2019 Value Penguin survey. Try these tips to engage everyone in your household in the effort.
Create a safe environment to talk about money
Discussing money can be uncomfortable. But remember money is just a tool of life.
When you were dating, your debt was likely a deal breaker. And if money was a taboo topic in your family growing up, it could feel awkward broaching the topic. But developing a positive relationship with money and thinking of it as a tool, not something that dictates your self-worth starts with candor.
You may find it easier to talk about money in general once you and your partner have discussed your specific financial situation with a professional. A certified credit counselor can provide a free evaluation of your debt and recommend next steps, which could ease some of the stress debt creates.
Or you can hop right into these strategies to start the conversation at home:
- How to talk about money with your partner: In a relationship, a partner will often step up as the one who pays bills and keeps track of day-to-day spending. That can be a healthy arrangement, as long as your other half knows where the money is going, too. Consider setting up weekly money dates to talk through how you’re moving toward savings goals and if spending in any categories has ticked up recently.
- How to talk about money with your kids: Include your children in discussions about planned purchases and show them that saving and budgeting allow your money to work for you. The Consumer Financial Protection Bureau (CFPB) Money as You Grow toolkit includes recommended exercises and conversation starters by age group. With kids ages 6-12, for instance, you can comparison shop online together when your family is on the market for a new TV.
Focus on savings, then debt repayment
As part of your new spending plan, make sure you’re setting aside money for emergencies. Not having enough saved is often what keeps families in debt: Less than half of Americans would be able to pay off their current credit card debt today if they had to, according to a recent ValuePenguin survey. Relying on credit cards means unnecessarily racking up interest, which further eats into your savings potential.
When you make spending changes, say, cutting your cable bill from $100 to $80 per month immediately set up an automatic monthly transfer from checking to savings for the difference. If you have no emergency fund, use the entire difference to build one until you have at least a few hundred dollars, or enough to cover occasional emergencies. Once you have a starter emergency fund, you can put more money toward debt repayment.
We just recently cut the cord. Our Comcast bill was near $300 each month. We cut out “On Demand” and dropped it to $200. However it was still too much and our internet was bundled in.
I found a different provider, Consolidated Communications, was able to get me faster internet for less money. I took the new service from Consolidated and canceled everything with Comcast.
Now I stream everything via Amazon Firestick. What I did not realize is how much free content is available via the Firestick. Netflix, at 8 bucks a month, plus Amazon Prime, (I was already a member) is all we spend now for our TV viewing. And now my in home WiFi is “Wicked Fast”
Adjust expectations with your kids
Scrutinizing your spending may show you’ve given the kids too many over the top gifts every holiday or birthday, or that you frequently buy them items on a whim. It may be time to reset expectations.
I spent $900 on XBox for my son when it first came out because I wanted him to be “Happy”.
“NOT VERY SMART“
Let them know that as part of your family’s goal to become debt-free, everyone will work together, which means they may get different kinds of gifts in the future. Focus on experiences you can share that also enhance your kids’ creativity.
Instead of giving them the latest video game console or popular toy, for instance, take the kids to a local nursery and buy plants or flowers you’ll plant in the garden and care for together.
Make cooking a family activity
We most often over spend on Food, Online Shopping and Clothing, according to a survey by ValuePenquin in 2019. I would add Christmas to this list.
To cut the amount spent on takeout or eating out, cook larger batches of meals together. You can search for recipes as a family and let each member choose one meal to cook each week, perhaps using your local grocery store’s weekly discounts as a guide. Cooking together is an opportunity not just to save money, but to guide your children through the process of measuring ingredients, staying safe in the kitchen and eating nutritious meals.
Reinforce healthy saving and spending habits
Encourage your kids to start developing their own independent relationship with money. Think about giving them an allowance when they’re in elementary and middle school, and discuss what they plan to do with the money they receive.
By helping your kids become savvy consumers, you’re also building in more accountability for yourself. If your child has decided to save some of their allowance for a new skateboard, check in and ask how they’re progressing — and encourage your kids to ask you whether you’re on track to meet your goals, too.
Debt repayment could bring your family closer together
Getting out of debt doesn’t need to be an isolating or shameful activity. Give your family the chance to join you. They’ll learn that financial hardship doesn’t have to define them, and you’ll get additional support and the satisfaction of helping your kids learn how to build their own strong financial foundations.
I found this to be very true. Twice recently we’ve had to follow our own plan primarily to work on student loan debt and a few credit cards that got out of control due to some business expenses I absorbed on my own.
Identifying a challenge and working toward a common goal is what all teams do. Working with your family on the challenge together and then succeeding should bring the family closer.
Everyone with even a little bit of debt has to manage their debt. On the other hand, when you have a large amount of debt, you have to put more effort into paying off your debt while juggling payments on the debts you’re not currently paying.little debt, you have to keep up your payments and make sure it doesn’t get out of control.
Know Who and How Much You Owe
This is alway an eye opener for the member of the couple not paying the bills each month.
Make a list of your debts, including the creditor, total amount of the debt, monthly payment, 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.
Don’t just create your list and forget about it. Refer to your debt list periodically, especially as you pay bills. Update your list every few months as the total amount of your debt changes.
I use a simple sheet in google to manage the starting point and progress.
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 and 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.
Debt Consolidation vs. Debt Relief
People generally don’t understand the distinction between debt consolidation, debt management, and debt relief. I certainly didn’t when I started.
With a Debt Consolidation Loan, you get a loan through a lender, like LendingClub or bank. You use it to pay off your creditors, and then pay the new loan off over time. You will still pay the full amount you owe, but hopefully at a lower rate than you already have.
Tackling your debt this way will affect your credit score like any other loan: your score will go down at first, but if you make payments on time your score will slowly increase.
One downside of debt consolidation loans is that you can still use credit cards and other forms of credit. So, if you don’t fix the habits that got you into heavy debt in the first place, you could end up making the problems worse by adding new credit card debt.
However, if you’d had success with your spending habits and can negotiate with your existing lenders, this can be a cheaper option than a debt management program.
A Debt Management Program is still debt consolidation but without a new loan. Instead, you work with a credit counseling agency to lower the interest rates and fees of your credit cards. Then, you pay the agency each month and they distribute payments to your creditors.
You may have to close the credit cards and agree not to open anymore. But you get free credit and money counseling, and your credit score and report are rarely affected.
A downside is that you will probably pay a monthly fee.
Finally, with Debt Relief, you pay part of your debt but get the rest forgiven. Debt settlement and filing for bankruptcy are forms of debt relief. This reflects negatively on your credit score and report for years and should be a last resort.
Avoiding Debt Management Program Scams
- Look for non-profit institutions and accreditations. Good debt management programs will have accreditations from trustworthy organizations like the National Foundation for Credit Counseling (NFCC), Council on Accreditation (COA), and the Better Business Bureau (BBB).
- You should initiate contact. Companies that reach out to you without you having asked for help is a major red flag.
- Pricing should be reasonable. Initial costs should be $75 or less with a monthly fee of no more than $50 a month. (This can be lowered at many companies based on your ability to pay.
- Don’t trust guarantees. No DMP can guarantee lower payments or interest rates before they negotiate with your lenders
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. 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 is where to use the Debt snowball Plan Dave Ramsey talks about oftern.
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, it would help to create a new calendar for each month.
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.
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 debt from growing and keeps your account in good standing. When you miss payments, it gets harder to catch up and eventually your accounts could go into default.
Use a Monthly Budget to Plan Your Expenses
Keeping a budget helps ensure you have enough money to cover your monthly expenses. Plan far enough in advance and you can take early action if it looks like you won’t have enough money for your bills this month or next. A budget also helps you plan to spend any extra money you have left after expenses are covered. You can use this extra money to pay off debt faster.
Use 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 six months of living expenses.
Summary
1. Reflect on How You Got Into Debt
2. Change Your Bad Spending Habits
3. Figure Out How Much Debt You Have
4. Decide How Much You Can Afford to Pay
5. Put Together a Plan
6. Start Making Payments
7. Don’t Create More Debt
It may not be smooth sailing on your path to debt freedom now. That’s ok. But with smart sailing and a crew in synch, you can captain your ship and chart the best heading for your family.
Happy sailing.
