Debt-Free Management Plan

Many consumers dream of living debt free. During tough economic times, it is easy to become dependent on credit to pay for basic essentials such as gas, food, daycare and housing. Utilizing credit is no longer a luxury but a necessity. Unfortunately for some, over-extending the use of credit can lead to financial ruin if they do not know how to manage debts properly.

Description

Debt management plans are an alternative to bankruptcy. They are designed to help consumers plan for a future free from debt. Debt management plans are offered through public or private consumer credit agencies. With a debt management plan, all debts not tied to an asset such as personal loans, credit cards, department store cards, lines of credit and collection accounts are grouped together. A credit counselor contacts all creditors on your behalf to negotiate payment arrangements. You pay a monthly lump sum payment and the credit agency disperses a portion of the payment to the creditors on your behalf.

Advantages

Debt-free management plans offer consumers a way to gain control of their finances. Once enrolled in a plan, creditors and collection agency calls usually cease and consumers are finally able to manage a workable budget. Debt-free management plans also eliminate or drastically reduce late payment fees and interest rates. Some plans allow consumers to completely restructure the terms of the credit account all together. Debt-free management plans also help consumers get out of debt faster than trying to pay off creditors one at a time. At the end of the program, consumers have a better understanding of credit and debt, as well as the resources to make better financial decisions in the future.

Drawbacks

A major drawback to a debt management plan is that there is a possibility it can damage your credit initially. Consumers enrolled in a debt management plan are advised to cancel all open, unsecured credit lines to avoid getting deeper in debt. Closing these accounts may cause a decrease in credit scores. Creditors may report to the credit bureaus that the account is managed through credit counseling. Some creditors view this as negative, while others do not. Another drawback is that once the management plan is complete, it is your responsibility to alert the credit bureaus to update your credit report. Otherwise, potentially negative items will continue to report on your file.

Free Help

Debt-free management help is offered through a variety of local and national resources. Locally, consumers can turn to their attorney general's office for information on organizations that help with preparing a budget, consolidating credit, stopping creditor phone calls and formulating a debt management plan. National organizations such as the Federal Trade Commission and the American Consumer Credit Counseling Agency offer programs and advice for consumers to understand fair credit laws, legal collection practices and how to become and remain debt free. Most debt management services are free or provided at very little cost to the consumer.