Debt Plan Advice - Understanding The Type Of Debt Plan That You Need
There are two main types of debt plan and these are designed to deal with different situations. Usually when we use this term we mean a debt management plan, or DMP. The other option for dealing with financial problems is known as debt settlement. I will explain the differences between these two approaches so that you understand what situation each is meant to address.
With a DMP the aim is to repay everything that you owe. When you are struggling to keep up with payments on bills, you can use a debt management company to negotiate with your creditors to set up new arrangements for the repayments you have to make. They will try to get interest rates reduced and will often manage to persuade the creditors to waive charges such as late payment penalties. As a result of these changes they are able to significantly reduce the amount you have to pay each month towards your debts.
Instead of paying all your separate debts, you will make only one single monthly payment to the debt management company. It is then their responsibility to pass on the agreed amounts to your creditors, and to deal with them over any queries. This system of consolidating all your bills into a single payment has huge advantages in terms of simplicity and brings great relief in not being bothered by creditors.
In order for a DMP to work, you will need to have a steady source of income and enough money spare each month to cover a reasonable payment into the plan. The advisor will go through your finances with you in detail before making any proposal, to ascertain whether your situation is suitable for a plan of this sort.
Debt settlement on the other hand is an entirely different process that involves trying to write off a big chunk of your debts. It is meant for very serious financial problems and is often seen as an alternative to bankruptcy. Most people who go into a debt settlement program have considered bankruptcy as an option. In general terms, the process would be suitable for people who did not have enough spare income to be able to afford a DMP.
When you enter into a plan of this nature, you will normally stop making any further payments to any of your creditors. The idea is to get them to settle your debts for less than the full amount, so if you were to keep paying them what you owe, there would be no incentive to settle. They are unlikely to agree to any settlement if they think you could be paying back the full amount owed, which is why this will only work in situations where you really cannot afford to repay what you owe.
The other incentive for creditors to settle is that they will normally be offered the settlement amount in a lump sum, or at least in a couple of quick payments. Most people in serious debt do not have money stashed away to make such payments, but this does not need to be a problem. The usual approach is that when you stop making payments to creditors you instead start putting money away each month into another bank account where it is saved up to make settlement payments. Another alternative that some companies offer is that they advance the settlement money and you pay it back to them over a period of time. The important thing is that you reach good settlements and only have to repay perhaps half of what you owe.
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