There was a time when debt management plans were especially restrictive. Many consumers found themselves in plans that were unrealistic for their budgets. Those days are long gone, however. Today’s debt management plans allow consumers to realistically approach and then formulate solutions for problems stemming from too much debt or an overall inability to pay due to job losses or other problems. It’s important, however, to understand that DMP is not for everyone.
Consider signing on for one of these plans only after a certified credit counselor has spent time thoroughly reviewing your financial situation, and has offered you customized advice on managing your money. Even if a DMP is appropriate for you, a reputable credit counseling organization still will help you create a budget and teach you money management skills. Often times you can find reliable resources for help at no or low cost; and even if there is a small fee, it’s money well invested when you consider the lessons you walk away with will serve you well the rest of your life.
How a Debt Management Plans Work
After you’ve met with your plan manager, you’ll come up with a plan that will allow you to pay down your debts without overwhelming you to the point that you feel defeated; after all, you still have lunch money to give out to the little ones and the occasional trip to the skating rink. Many people wrongly believe you go into a life of seclusion. That’s not necessarily so. You deposit money each month with the credit counseling organization, who then uses those funds to pay down your debts, including your credit card balances, student loans, medical bills and other unsecured debts.
Another added benefit of having a debt management plan is your counselor is often able to negotiate with your creditors the various late fees and other costs tacked on during your tough economic times. This can lower your balances immediately and you won’t feel so overwhelmed. It’s a great incentive. You’ll be required to make each and every payment to the debt management plan. It will likely be much easier since you no longer have the burden of keeping up with several payments, instead, you’ll only need to make your deposits.
Keep in mind, these are not overnight fixes and because you’re usually lowering all of your payments, it can be time consuming. The end result, however, is fewer sleepless nights and coming through the other side debt free without the burden of a bankruptcy. Think of it this way: two or three or four years will pass anyway. Do you want to spend any of that time dodging collection calls and feeling overwhelmed? Those payments and accounts are going to be there. A solid repayment plan reduces the stress.
There might also be a stipulation that you not apply for any new credit during the life of the DMP.
Obligations of the Company
There are certain things you need to ensure are in place before signing any kind of contract or paperwork. These disclosures are important. Ask the service or organization the pricing and terms. They must disclose any and all fees, along with any conditional requirements you will be held to. The company must also provide a copy of these disclosures to you.
You should also get in writing the anticipated time span; how long it will take and also any potential problems such as the unwillingness of a creditor to work with you and your DMP. It’s not often a creditor will decline to participate, but for the most part, creditors are usually more than happy to accommodate your change in financial situation. Also, be sure to get a copy of any negotiations between your DMP and your creditors. This is important as it will affect your monthly payments and the total you ultimately pay into the plan.
Bad as you hate to think about, there are tax considerations, including the potentiality card companies and others may report settled debt to the IRS. Odds are, the IRS will consider it as income, unless you are insolvent. You are insolvent when your total debts are more than the fair market value of your total assets. These are complicated dynamics, so reach out to a qualified professional for clarity.
Finally, be sure you understand what happens in the event of non-payments on your part. No one goes into a DMP with the idea that they’re going to miss a payment, but as the last few years have taught us, nothing is certain when it comes to economic considerations.
Go into it with an open mind and keep your eye on the ball – it’s the long term focus that will see you through to better days that don’t include worries over making your MasterCard payment or worries about losing your home or car.
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