A debt management plan is one of the tools that you can use in your debt relief efforts. However, unlike a budget plan, this is exclusive to the debt management program.
Any project or endeavour can be best achieved if you have a guide to help you every step of the way. It helps you put things in perspective. It gives you directions especially during confusing times. It also reminds you of how far you’ve come since you started and how long you have to work before you reach your intended goals. All of this and more can be enjoyed when you create the right debt management plan or DMP.
Debt management programs are usually graced with the presence of a debt counselor. They are there to help you analyze your financial standing so that you can create a realistic DMP. You can expect them to take the lead as to what component should be included in this plan. But for the sake of knowing, let us discuss the various details included in a debt management plan.
First of all, it contains the details of your debts. Of course, we only mean the debts that can be enrolled in a debt management program. These include your credit card debts, medical bills, personal loans and other unsecured debts.
You need to list all these debts, their respective creditors, the current balance, the minimum payments, monthly due date and the interest rate. There may be other details that will be specified by the counselor but these are usually the salient debt details.
Once you have all these details, you will divide it based on your preferred payment term. For instance, your $10,000 debt can be stretched over 5 years or your $2,000 debt can be stretched over 2 years. That depends on your financial capabilities. The only limitation is you cannot go over 5 years. This is done to arrive at a lower monthly payment because you have stretched it over a longer payment period.
To know your financial capabilities, you need to analyze your finances to see how much you can afford to pay for each debt. The disposable income refers to what is left of your income when the basic expenses have been paid off. You need to maximize it by lowering your expenses or growing your income.
It is advised that you put aside a sum of money for your savings. It is probably best not to tell this to your counselor as they may demand that you put it into your debt payments. Although some may advise you to set aside an amount on your reserve anyway – which is a sign of a good debt management company. It shows that they are concerned about your overall financial health and not just your debts.
When you have completed all the details, you will see a lower monthly payment and the maturity date of your new payment term. This is what the counselor will show your creditors. They will negotiate with them to accept the lower monthly amount – with the condition that you will not miss out on payments. This is why you should consider the details of the DMP carefully to make sure that you can really afford them.
Once approved, you will send a single payment towards your counselor who will distribute it to your respective creditors. While your accounts are enrolled in a debt management program, you cannot use them so the chances of you incurring more debts will be kept from happening.