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Debt Management Plan

Debt - and trying to get out from under it - has become a way of life for many Americans. We've become consumed by credit card after credit card - and their corresponding high interest rates and penalties - not to mention car payments, home mortgage loans and the pressures to save for retirement or a child's college fund. It's easy to see how the debt can quickly spin out of control; today, the United States faces $2 trillion in debt - almost $12,000 per household - and that number only continues to rise.

The obvious question is how to get out from under all the debt - but the answer can be much less obvious. There are a large number of ways to eliminate debt from your finances, all depending on your unique financial situation. Sometimes all it takes is a good budgeting plan - taking a look at your income and your expenses, and figuring out where you can cut costs and allocate funds towards paying off your debt. On the other end of the spectrum lies debt settlement and bankruptcy - proven ways to eliminate debts, but they have a negative impact on one's credit rating. In the middle lies another alternative - credit counseling - through which you enter into a debt management program. Let's take a closer look at what this all entails.

Debt Management Plans: An Overview

The National Foundation for Credit Counseling (NFCC) defines a debt management plan (or program) as a systematic method for paying down your debts. Debt Management Plans require you to enroll with a credit counselor, who sets up an account for you to make monthly deposits into. The deposits are then used to pay off the debts you owe to your creditors. The advantage to the debt management program is that while you are making these deposits, your credit counselor negotiates with your creditors to waive existing penalties, lower your interest rates and reduce finance charges. Credit card companies tend to be amenable to these newly proposed terms, because when they learn you've enrolled in a debt management program, they take it as a sign that they will be able to recoup more of what is owed to them than if you just continued to struggle making monthly payments yourself.

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The other benefit to enrolling in a DMP is that you'll likely be able to pay off your debts quicker than you would be able to on your own --especially if your interest rates were to remain the same! Your total debt amount will determine the timeline of course, but generally it takes somewhere from three to five years to pay back what you owe - and without the Plan, you could very likely spend twenty years paying it back (and likely spending much more because of accumulating interest!). Of course, if you don't "stop the spending" and "stop the bleeding", it's quite likely that you would NEVER get out of debt for your entire life.

Debt Management Plans are used extensively to pay off credit card debts, but these are by no means the only debts that a DMP can help you to eliminate. Almost all unsecured types of debts qualify - store cards, personal loans, medical bills, doctor's offices bills, utility bills, cell phones, memberships, subscriptions, and bank overdraft fees are all debts that can be reduced and eliminated through a qualified debt management program. However, secured debts like car payments, mortgages and rent are typically non-negotiable for the credit counselor, and so they don't quality for a debt management plan.

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Debt Consolidation Loans

In the financial recovery industry, a debt consolidation loan is often used as an umbrella term to describe debt relief, which goes right along with what a debt management program can do for you. These terms all refer to a scenario in which you consolidate your high-interest monthly payments under one low-interest payment, and then pay off that one payment steadily over time until the debts are cleared.

In addition, debt consolidation can refer to two types of loans - secured and unsecured - that you can use to get out from under debt. Unlike with a debt management plan that requires you to enroll in a credit counseling program, debt consolidation loans are available to you directly from your bank. Let's look at the differences in the loan types:

Unsecured Loans

These types of loans are popular with individuals who owe a mild-to-moderate amount of debt; usually under $8,000. You can obtain an unsecured loan without having to put up your house (or other valuable asset) as collateral, and since the interest rate on the loan is usually MUCH lower than that of the credit cards you're trying to pay off, the loans can play a big role in eliminating the debt that you owe. However, it's important you pay off the loan steadily and on time each month; otherwise, you risk further damage to your credit report and can fall even farther into debt.

Secured Loans

When you have more than $8,000 in unsecured debt, a secured loan can be a great way to tackle the problem (again, because the interest rate on the loan is so much lower than what you're paying now). However, since these loans are offered for substantially higher dollar amounts, they usually require you to put your house up as collateral. This means that if for any reason you stop making payments on the loan, not only will your debts NOT get paid off, but you could potentially lose your home as well. Therefore, before deciding that a secured loan is right for you, make sure you're in a position to make steady payments so as to avoid this catastrophic situation.

Get started today on the path towards financial stability!

Debt Management may be a great way for you to get out from under debt, but only if it truly works for your individual financial situation. Assessing the right plan of the attack is best left to an experienced credit counselor - but finding the right counselor is just as important as any decision that comes afterward. So do your homework - consult with the Better Business Bureau, interview a number of candidates, get answers you're satisfied with to the questions that matter...and then you're finally ready to make the leap into a Debt Management Program, you can be confident you've made the right decision and you're on your way to a debt-free life!

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Creditors calling?

When you're falling behind with credit card debts and creditors are calling – it feels great to know that there's a debt program to lower your payments and get you out of debt much faster than you ever imagined.
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Unexpected bills

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Retire debt free

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