Whether done on your own or through a third-party constituent, debt management is the process through which a debtor works to repay their pending debts. When done through a company, debt management often involves negotiations directly with your creditors in the attempt to lower payments and/or interest rates. There are many paths to debt management, several of which are listed below.
Debt reduction is a process selected entirely by the debtor. While they may seek the consultation or assistance of a debt company, there are many ways in which individuals can reduce their own debt. For instance, specific strategic payment plans, like the debt-snowball method, can help a debtor come closer to achieving financial security. Debt settlement is another common option, in which a debtor communicates directly with their creditors to come to some sort of account-closing agreement in exchange for payment. Debt management plans (DMPs) are also popular, although they require the assistance of an outside source.
In order to lower monthly payments and often receive lower interest rates, debtors can opt to consolidate their debt. In doing so, the debtor takes out either a secured (collateral based) or unsecured (higher interest rate) consolidation loan, which immediately pays off creditors and allows the debtor to focus on paying off one loan, rather than several. Debt consolidators often work on the debtors behalf to negotiate lower balances and save the debtor money. However, many debt consolidators charge consultation and account management fees. In addition, interest accrued over a longer period of time often results in the debtor paying more money in the long run than originally owed. Still, this can prevent debtors from having to declare bankruptcy.
When a debtor files for bankruptcy, they legally declare that they are unable to pay off their creditors. There are six types of bankruptcy under the Bankruptcy Code:
- Chapter 7: basic liquidation for individuals and businesses; also known as straight bankruptcy; it is the simplest and quickest form of bankruptcy available
- Chapter 9: municipal bankruptcy; a federal mechanism for the resolution of municipal debts
- Chapter 11: rehabilitation or reorganization, used primarily by business debtors, but sometimes by individuals with substantial debts and assets; known as corporate bankruptcy, it is a form of corporate financial reorganisation which typically allows companies to continue to function while they follow debt repayment plans
- Chapter 12: rehabilitation for family farmers and fishermen;
- Chapter 13: rehabilitation with a payment plan for individuals with a regular source of income; enables individuals with regular income to develop a plan to repay all or part of their debts; also known as Wage Earner Bankruptcy
- Chapter 15: ancillary and other international cases; provides a mechanism for dealing with bankruptcy debtors and helps foreign debtors to clear debts.
To determine the best way of handling debt, credit counselors meet with debtors to negotiate some sort of repayment plan or debt management plan. Under a DMP, credit counselors will work directly with the debtors and creditors to negotiate lower payments, fees and interest rates, allowing the debtor to pay off their balances and stay on top of their finances. Certain debt, such as rent, utilities and mortgages, are considered secured debt, and are not eligible for negotiation under a DMP. However, unsecured debt like personal loans, credit cards and bank overdrafts are eligible. While some credit counselors will charge fees, others do not.
For a more in-house debt management technique, individual or company debtors can use budgeting to itemize and control their debt. Budgeting mainly involves the debtors keeping track of their own spending, noting where the money is going in order to better strategize how to save. For debtors unsure of how to budget on their own, accountants are very popular when budgeting is involved. They can take all a debtors spending statements and financial records to help organize their financial records. At that point, they can professionally determine how best to save the debtor money. Whether on own or through an accountant, budgeting is a long-term process that requires patience and common sense.