Chapter 3. What are debt management plans?

Then, what kind of debt management plans can we choose? 

 

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How to

Depending on your level of debts and your situations, there are different options: Consolidation, Negotiation, Repayment plans, Settlement, and Bankruptcy.

1.  Consolidation

    • Debt consolidation is taking one new debt to cover all debts combined
    • The new interest rate is usually higher
    • The full cost of the loan is greater due to a longer paying period
    • You will achieve easier monthly payments, but fees for services are required to be paid up front

2. Negotiation

    • The concept of convincing creditors to reduce the total amount owed in lieu of a set fee paid up front
    • Creditors are under no obligation to accept debt negotiation.

3. Repayment plans

    • Restructuring debt for easier monthly payments
    • Usually, you end up paying higher interest rates, a longer number of years to finish payments and higher overall cost of debt
    • Creditors are under no obligation to accept, and fees for services are required to be paid up front

4. Settlement

    • Offering a % to settle the debts
      • It is a step before full bankruptcy
      • Takes 3-5 years to complete
      • Affects your credits 7-10 years
    • Acceptance of settlement is optional by creditors, but fees and interests keep accruing while a settlement is in a process
      • The cost of services is an added burden to the debts and is usually required up front

5. Bankruptcy

    • Bankruptcy should be the last resort as it badly affects your financial reputation and your FICO Score.
      • Consider all other options before you go this route
    • Bankruptcy can be done in filing Liquidation (Chapter 7 of the Bankruptcy codes) or Reorganization (Chapter 13 of the Bankruptcy codes)
    • Some legislation is being lobbied to allow student loans to become dismiss able in a bankruptcy, but as of 2017, student loans are NOT dismiss able in a bankruptcy
      • You need a plan to keep you in good standing on your student loan repayments.

 

Practice

Now that you know all the options for managing excessive debts, think of paying it forward and discuss these plans with a friend or a family member.

 

Congratulations! You can move on to Chapter 4. How do I avoid debt settlement and debt elimination scams?

To review the full module on Debt Management, click here.