Five Things You Should Know About Debt Management Before Making the Call

  • 5 min read

When debt becomes too overwhelming for a consumer to handle on their own, there are several options available to them.

Debt management is one of the strategies – a popular one – and it centers around negotiation with creditors, careful examination of cash flow, and several other methods that are intended to get debt under control.

If you’ve been struggling with debt and have been researching your options, it’s likely you already know a bit about debt management. If you’re considering a consultation, there are a few things you might want to consider before making the call:

Debt management is not a “quick fix.” These programs will typically last 3-5 years and require a certain amount of effort and commitment from the borrower. You absolutely must be able and willing to stick to the terms of the plan, because failure to follow through will negate any of the headway made through negotiation.

That means losing waived fees, reduced interest rates, and any other concessions.

 There are other options that may suit your situation better. Debt management plans are only one means of conquering debt issues. There are also consolidation loans, DIY plans, possibilities of settlement, and even bankruptcy.

We recommend speaking with a certified credit counselor for a detailed analysis of your unique circumstances.

You will need to survive without credit cards for several years. Closing down your credit card accounts is part of the process. In most cases, you will be asked to live without them for the duration of the program (3 to 5 years.)

Sometimes, borrowers are allowed to keep one credit card for emergencies, but this is a rare concession.

Your participation is critical. Even the best debt management plan can fail if the client doesn’t do their fair share. As the consumer, you will need to be honest and forthright about your financials when the process begins. You will also need to follow through with the plan, making all payments on time and tracking your progress diligently. You should also use the opportunity to learn as much as possible about money management.

Self-education is a great way to avoid problems in the future.

A debt management program can still affect your credit. Yes, there’s no guarantee that your credit score will come through the process smelling like roses. How much a debt management plan affects your credit rating depends on a lot of factors, but it is a possibility.

If your management agency is making your payments for you on time, then the negative impact should be minimal. The biggest damage to your credit score will likely come at the very beginning, when your credit card accounts are closed. This will impact your debt-income ratio and lower your credit score.

With these considerations in mind, it’s important to note the benefits of a debt management plan. Ideally, such a strategy will have you out of debt in 3-5 years and it will halt all harassment from debt collectors immediately.

While it’s not the only option, debt management is definitely an option worth considering.

Are you ready for debt management? Here’s how to find out.

Debt management can be a fantastic way to get out from under financial problems. For many consumers, a proper debt management plan provided a way to completely eliminate debt and start a new financial life in less than five years.

Facing your own debt situation? If you’re considering a debt management program, read on.

Before you go all-in on a debt management program, you should consult with a credit counseling organization. We agree with the Federal Trade Commission’s recommendation: find an agency that uses certified credit counselors.

Back up your selection with a quick search on the Better Business Bureau website. Look for any complaints from consumers that have been filed against the agency.

Once you’ve selected a trustworthy credit counseling agency, you’ll be interviewed by a credit counselor. The interview will be used to determine important details about your unique financial situation (so be completely honest.)

The key determining factor will be your budget. If you’re able to cut expenses enough to afford repayment, then the counselor will probably recommend a debt management plan. (If, even after careful budgeting, your cashflow is too low to allow for basic living expenses and repayment, you may find yourself in the dominion of bankruptcy.)

The above is a simplified version of the entry process, of course. A trained counselor will use many factors to determine whether or not debt management is right for you.

There are also some questions you can ask yourself when deciding whether or not to pursue debt management as an option:

Can you live without credit cards?

As part of the plan, you will likely be asked to close all of your credit card accounts. You will need to live for several years without credit cards, as opening new lines of credit will likely carry heavy penalties.

Do you have the self-discipline to stick to the plan for 3 – 5 years?

The plan will require your cooperation. Not only will you need to make all payments on time, but you will need to avoid creating any new debt.

Are you able to address the problem without outside help?

Begin by making your own budget and cutting expenses as much as possible. Can you take on the debt without bringing in a third party? If so, you may want to tackle the problem yourself. Debt management can be very effective, but it typically comes with fees. If you can change your spending habits and resolve the issue by yourself, there’s even more money to be saved.

Christopher - BSc, MBA

With over two decades of combined Big 5 Banking and Agency experience, Christopher launched Underbanked® to cut through the noise and complexity of financial information. Christopher has an MBA degree from McMaster University and BSc. from Western University in Canada.