Debt Management Plans - How They Work
by:
BMA Editorial Team 3
Severe debt not only strains monthly budgets, but also negatively affects credit scores. On a personal level, high debt creates stress, worry, and can ultimately result in physical ailments and strained personal relationships. As such, those with exceptionally high debt may benefit from a debt management plan set up through a credit counselling firm.
These plans help consumers pay down their debt in a reasonable amount of time, generally 60 months or less, while reducing the amount of collection calls, late fees, and increased interest rates. For those drowning in debt, late fees and penalty increases in interest rates simply add to an already insurmountable problem.
A debt management plan (DPM) through a credit counsellor or other agency is similar to restructuring through bankruptcy. However, it does not require official court procedures, forfeiture of assets, or attorney fees. Rather, credit counsellors work with a client's creditors to establish a repayment schedule that fits the client's monthly budget while still repaying their debt.
The client makes a pre-established monthly payment to the credit counsellor, who then disperses funds to creditors per agreement. Late fees stop and, depending on the creditor, previous fees may be removed from the client's balance. Likewise, since payment arrangements have been made, collection calls and penalty interest hikes also cease.
As part of the arrangements set up by credit counsellors or other debt management plan (DPM) professionals, most creditors must agree to accept reduced monthly payments or offset debt balances. In some instances, creditors may even reduce interest rates to below pre-penalty increase rates, or even below original loan rates.
It is best, for this reason, to employ the services of a third party such as credit counselor to take advantage of their pre-existing relationship with many large or national lenders and financial institutions. That relationship often results in a better repayment plan or deal to reduce debt.
A debt management plan may still result in a negative effect on the client's credit report, but not as badly as a bankruptcy or charge off. The goal of DPMs is to create an organized, comprehensive, and do-able method for consumers to repay their debt and regain control over their financial lives.
Some counseling services will also help clients to begin re-establishing their credit worthiness once they have completed their DPM and paid off their debts. By following the advice of such financial advisors, many consumers are able to rebuild their financial lives in less time than it would take to recover from bankruptcy...
About the Author:
Tracey Mclaren is a finance and loans expert who is currently researching the various channels of debt solutions. Visit
http://directdebtsolutions.co.uk/ to learn more.
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