Debt Management Plan or Debt Consolidation?
How to Overcome Financial Difficulties with Lower Monthly Repayments
May 25, 2009
According to the U.S. Congress' Joint Economic Committee, "As household wealth has declined in the downturn, more American families are facing financial distress due to high debt burdens. In 2007, before the recession began, 14.7% of U.S. families had debts exceeding 40% of their income." This has meant that those struggling with financial difficulties are considering entering a debt management plan or taking out a debt consolidation loan to lower monthly repayments.
Debt Consolidation Helps with Financial Difficulties
Debt consolidation involves putting all borrowing sources, such as overdrafts, credit cards and smaller loans, under one roof and making a single payment. It is possible to extend the term of a loan in order to lower monthly repayments and simplify family finances. Financial difficulties are alleviated as more money is left over each month for essential household bills and house payments.
Is There a Downside to Debt Consolidation?
Only those with good credit will be able to get a debt consolidation loan. Homeowners should think carefully before turning unsecured debt, such as credit card debt, overdrafts and smaller loans, into personal debt that is secured on a house. This collateral gives creditors the right to foreclose in order to retrieve their money in the event of the borrower defaulting.
How a Debt Management Plan Differs
A debt management plan does not involve taking out a further loan. Instead financial difficulties are dealt with by making a lower monthly repayment to an appointed debt management agent or charity; they then disseminate money to creditors on a pro rata basis. There is no debt write-off, but repayments are reduced so household bills can be more easily managed.
Do Debt Management Plans Work?
Debt management plans do work, but it can take a number of years to clear the full amount owed. This is because the lower monthly repayments don't pay-off debt nearly as quickly. It may be possible to reduce interest payments and stop further charges, but FICO scores will be negatively affected. However, consumers who have already damaged their credit score as a result of missed or late payments may benefit.
Whether a Debt management plan or debt consolidation is the right option will depend upon one's credit history. Both solutions will help to lower monthly repayments and alleviate financial difficulties. Borrowers should always think carefully before turning unsecured debt on credit cards and overdrafts into debt secured on a family home. Always talk to a qualified debt counselor before proceeding.
Readers that found this article useful may also be interested in credit card debt settlement. Others may benefit from finding out more about chapter 7 bankruptcy or chapter 13 bankruptcy.
Sources
(May, 2009) U.S. Congress' Joint Economic Committee, "Vicious Cycle: How Unfair Credit Card Company Practices Are Squeezing Consumers and Undermining the Recovery".
Disclaimer: This article in no way attempts to give legal or tax advice. One should consult a licensed attorney, tax advisor, or other qualified professional.
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