One of the symptoms of this economic recession is the recent explosion of debt management advertisements on TV and on the Internet. Debt management is a complex and sometimes confusing topic and these ads only complicate the situation by providing misleading information and making false promises.
Despite what these companies tell you, there is no such thing as a debt management option that works for everybody and one of the trickiest parts about getting out of debt is finding the right debt management tool for your situation. If you are in a tight financial spot and are curious about debt management, then hopefully the information in this article can finally answer some of the questions you may have.
What Type of Debt and How Much Debt Qualifies for a Debt Management Program?
Not everyone who is in debt should enroll in a debt management program. The amount of debt required to seek the aid of such a program varies depending on the person’s income and total assets, but on average a person should have at least $2,000 of unsecured debt before signing up for one.
Unsecured debt is any debt that is not tied to a title and, therefore, has no collateral. Examples of unsecured debt include credit card debt, personal loans, and medical bills. Secured debt is debt that uses a piece of property such as a house or car for collateral. Secured debt is considered lower risk for lenders since they can sell the collateral promised by the debtor if the debtor defaults on the loan. Since unsecured loans are considered higher risk, they usually come with higher interest rates.
How Much do I need to Pay Per Month Toward My Debt?
Even if you have at least $2,000 in unsecured debt you still need to see if you can make a large enough minimum monthly payment to make a debt management program worth your while. If you can’t pay at least $200 a month to your debt management plan then you should probably avoid enrolling in one. Debt management programs can help you get out of debt, but they will charge some fees in the process. If these fees are greater or equal to the interest you are paying on your debt then joining a debt management plan doesn’t make sense.
Should I Include All my Unsecured Debt Into a Debt Management Program?
You should include all of your unsecured debt that has a high interest rate. If the interest rates on your unsecured debts are already relatively low, then there is not nearly as much that a debt management program can do to help you. For a debt management program to provide you with any substantial benefits, you should only include debts that are charging you an interest rate of 10% or more. Anything less than 10% and the fees you pay for the debt management plan will likely be more than what the plan can save you.
I’ve Been Hearing a lot about Debt Settlement
Debt settlement is something you should only try to do if you can no longer make the minimum payments outlined in a debt repayment plan. Debt settlement is far riskier than normal debt management and should therefore only be attempted if debt management is not an option. People who opt for debt settlement usually cannot make the minimum payments that they have on their debts so they enlist the help of a debt relief company to negotiate a reduced debt with their creditors. If the creditors don’t agree to the settlement they may raise your interest rates and try to collect the debt any way possible, which can include taking you to a civil court in order to repossess your property or garnish your wages.
That Sounds Scary! Why Would Anyone Take That Risk?
Debt settlement is risky, but creditors will try to collect from you whether or not you attempt to settle. Debt collectors are notoriously aggressive and will call you day in and day out in an attempt to get money from you. Fortunately, debt settlement is now an accepted debt management strategy and any reputable debt settlement program you enroll in will let your creditors know that you have started their program. This often gives creditors confidence that you will pay them back and as a result they will usually not take you to court, but it cannot guarantee it. The risk involved with debt settlement is the reason that it should be the last option you try before declaring bankruptcy and you should only try it if you cannot afford to repay your debt through a debt repayment plan.