Debt relief options - debt consolidation and debt management plans

There are endless reasons why households incur substantial amounts of consumer debt.  For the moment those reasons cannot be changed, so instead, we focus on available methods to get out of the debt.  In addition to paying down debt by the snowball or avalanche methods, programs and products exist to assist consumers in reducing and eventually eliminating debt.  The four that we will cover in the next two blogs are:

• Debt consolidation

• Debt management plan

• Debt settlement

• Bankruptcy

Each option involves similar components - unsecured debt, time commitment and fees - but they also have specific attributes. 

Debt consolidation

Debt consolidation utilizes a lending product to pay off unsecured debt.  The borrower pays off the outstanding debt with the loan funds, then makes a single monthly payment to pay off the loan.  Debt consolidation can be managed by a debt program, or the borrower can apply for a consolidation loan themselves.  The amount and type of debt, along with the health of the individual's credit, will determine if this is a good option or not.  Typically, debt consolidation programs are used by individuals with $10,000 or more in unsecured debt.  If the individual needs accountability to pay off the debt, using a debt consolidation program might be the preferred route.  If the individual has their own support network, and can stick to a repayment plan, doing the consolidation themselves could be a workable, and less costly option.  It all depends on the circumstances. 

A borrower who is considering the DIY route for debt consolidation can compare rates and terms on www.bankrate.com or www.nerdwallet.com.  Bankrate will provide a list of potential lenders, while Nerd Wallet will walk a potential borrower through a questionnaire to determine the best lending options.[1]  A borrower can also use a personal loan calculator to estimate costs to pursue that remedy.   If they want to go deeper, following the questionnaire on either site will offer more specific loan terms and potentially pre-qualify them for an actual personal loan to consolidate their debts. 

No matter the pathway the borrower chooses, they should be informed about the available options.  This loan will live on the credit report, so awareness is key.  You cannot dispute in the future what you failed to educate yourself about in the present. 

Debt management plan

Another remedy to address significant or overwhelming debt is a debt management plan (DMP).  Nerd Wallet makes an interesting point on 'overwhelming' debt - a debt-to-income ratio greater than 43%.  Lenders use the debt-to-income ratio to help determine the credit worthiness of a borrower.  Thirty six percent (36%) and under, is the rule of thumb.  A simple calculation helps a potential, or current borrower determine where they land in that range.  For example, if an individual takes home $1,000.00 per month, $360.00 or less, is within the normal range for that ratio.  Using the 43% reference, which equals $430 out of the $1,000 monthly take-home pay, gives a more objective view of how much debt can be considered overwhelming.  This makes the situation more personal to the borrower.  Reducing $12,000 in debt does not carry the same burden among all borrowers.  If a borrower makes that quick calculation and finds they are around 40% or over, implementing the debt management plan can be a helpful tool.  A debt management plan involves an agreement between a borrower and creditor, facilitated by a credit counseling agency.  A DMP does not utilize a lending product like debt consolidation.  Credit counseling agencies use their relationships to negotiate lower interest rates or monthly payments, or no negative fees on unsecured debts.  The credit counseling agency takes the place of the borrower and becomes the 'payer' on the account.  The borrower will send a single payment to the credit counseling agency, and the agency pays the group of creditors represented in the plan.  Payments remain current, which can assist in maintaining a decent credit score.  Note that while a borrower is enrolled in a debt management plan, they are prohibited from opening additional credit throughout this long-term commitment. 

This begins our discussion on available remedies.  We will review debt settlement and bankruptcy to reduce significant debt in the next post.  None of these methods are perfect, nor do they change the financial picture overnight.  But they should be entered into with multiple data points and information to make a strong decision.

50/70/100 isn't far away!  Facing a mound of debt is never pleasant, but there are ways out.  StudioM Financial can help you work through the options and develop a plan that works for your situation.  Reach out by phone or email at (469) 615-0387 or letstalk@studiomfinancial.net.  Until we meet, keep working on the change.

[1] Neither StudioM Financial nor Katrena Pitts are paid partners of Bank Rate and Nerd Wallet.  They are really good resources that I am happy to share.