Considerations for Creating (& Following) a Debt Management Plan

Living under the weight of debt is stressful. Having lots of debt to repay can impact all facets of your life, from your financial health to your mental and physical well-being.¹

Figuring out how to manage debt is an important priority that can feel daunting at times. But rest assured, you're not the only one in this situation — and there are viable solutions. A debt management plan can help to provide a path to get you on track to tackling your debt.

If you're currently struggling with debt, here's what to consider.

What Is a Debt Management Plan?

A debt management plan is a strategy aimed at helping you systematically reduce your debt over a period of time, likely the course of a few years.

Working with a credit counseling agency is one approach. These agencies can provide advice on money management and may help you approach lenders (such as a credit card company) to establish a plan for repayment and potentially reduce interest rates. The agency can negotiate with the lenders on your behalf, and it may help to restructure your debt into one monthly payment that lasts between three and five years.

You may have to pay a fee to work with these agencies. If you decide to go this route, it's wise to make sure the agency is accredited by the National Foundation for Credit Counseling.² It's also important to note that if you don't go through with the debt management plan, the agency you're working with will notify your creditors that the plan is no longer active. As a result, all of those debts will likely be due immediately or sent to collections.

You can also decide to create a plan on your own. It may just take a bit more planning on your part. Forming a plan to repay lenders can help you stay organized while meeting your current financial obligations and reducing your debt.

When Should I Consider a Debt Management Plan?

The answer to this question largely depends on your personal situation. In some cases, working with an agency to create a debt management plan may be an option before deciding to declare bankruptcy.

However, that doesn't mean you can't work on your own plan before you get to that point. If you currently feel your debt is becoming overwhelming and you're struggling to pay it and live, a formal plan might be a good option for you to consider. It's important to explore your options before debt becomes too much to bear.

Just keep in mind that debt management plans are typically only available for secured debt and some of your creditors may not agree to a negotiated plan. It's also important to note that a debt management plan won't fix an underlying problem with overspending.

Will Debt Management Impact My Credit Score?

If you work with an agency on debt management, it will be reported to the credit bureaus and may affect your credit score — especially if you have credit cards that are closed. However, if you follow through with managing your debt — including paying your bills on time and reducing the total debt you have — your credit score could potentially increase over the long term. A debt management plan may show lenders that you're actively working to make progress, but it can also help to reduce your outstanding obligations, which credit bureaus may view favorably.

Considerations Around How to Manage Debt Independently

If you want to work on creating and following your own debt plan, know that it's entirely possible. Here are a few strategies that can help you get started:

• Look at your spending. When first considering a debt management plan, take a month or two and go over all your income and expenses. It can help to create a budget. You'll also be able to see where you could make some cuts and how much you'll be able to put toward paying off debt every month.
• Get a clear picture of your current debts. Collect information on everything you owe, including any loans, credit cards or medical debts. Be sure to gather the total debt you owe, interest rates, minimum monthly payments, the lender's name and contact information.
• Contact the companies where you owe money. It can help to call and ask for a reduced interest rate or to negotiate debt repayment. Companies are frequently more receptive to this than you might think. If this feels a bit nerve-wracking, write out a script and have your notes on hand to help answer questions.
• Map out a plan for reducing your debt. One popular option is to look for the debt with the highest interest rate and pay that off first. You could also choose to start with the lowest balance. Either method works. While you'll typically save money over the long-term by attacking the highest interest rate debt first, you might feel more progress at the start by paying off that first debt completely.

Know how much you owe and negotiate repayment plans to reduce debt.

4 Best Practices for Managing Your Debt

Regardless of which path you choose, the most important thing is to stick to your plan once it's set. These four actions can potentially help you improve your position:

1. Make a payment toward your debt every month. Even if it's the minimum amount, every little bit helps — so make a plan to submit regular payments. Building up a history of on-time payments is one of the best ways to increase your credit score. And any payment to reduce debt is better than nothing.
2. Consider automating your monthly debt payments. Once you know exactly how much you need to pay every month, you can set up an automated system. This way, you may not have to worry about missing a payment.
3. Track your progress and celebrate your wins. Paying down debt is a long-term goal for many, and there might be times when you'll feel discouraged. A good way to stay motivated is maintaining a spreadsheet that shows how far you've come, as this can provide a big mental boost when you need it.
4. Take advantage of free resources for debt management. Finally, consider getting a free credit report at AnnualCreditReport.com, and make a plan to monitor your score moving forward.³ Even if you don't work with an agency, many accredited non-profit organizations offer free consultation calls or educational materials on debt management. Don't hesitate to take advantage of the helpful resources available to you.

If you want to tackle your debt, it's never too late to start managing it. Creating a plan now will help you pay down debt, improve your credit and have more savings for retirement. If you decide you'd like individualized support, consider contacting a financial professional who can help you customize a repayment plan that works for your situation.

Sources

1. Debt and mental health. https://www.mentalhealth.org.uk/explore-mental-health/a-z-topics/debt-and-mental-health.
2. National Foundation for Credit Counseling. https://www.nfcc.org/.
3. AnnualCreditReport.com. https://www.annualcreditreport.com/index.action.