A simple definition of the term Debt Management is any action or method used to help a person manage their debt. While this definition is quite broad, it includes services such as debt consolidation, debt settlement, bankruptcy, personal loans, and any other technique that can help consumers deal with outstanding debt.
When talking about Debt Management, the term Debt Consolidation is most commonly spoken of. The idea behind debt consolidation is this: A consumer enters into a program that allows them to lower their monthly payments and interest rates by combining all of their outstanding debt into one large debt. Then, once a month, the individual makes a payment to the consolidation company, which in turn is responsible for distributing the corresponding funds to the corresponding companies. The theory behind this is that the customer pays lower interest rates while at the same time simplifying the payment process as he or she alone no longer has to make payments to numerous individual creditors.
However, there are falls in the consolidation process. Programs typically last around 5 years, and while one may be paying a lower monthly interest percentage, the length of the program still means the client pays a large amount of interest over the life of the program. Consolidation companies also require you to pay monthly maintenance fees of $30-50 per month, which add up over time. The biggest danger of these programs is the quality of the consolidation companies. There are several disreputable companies in the market that do not keep their promises to customers, especially by not distributing funds in a timely manner. Finally, participation in these programs can have negative effects on your credit score that cannot be repaired until after the program is complete.
Another popular form of debt management is the debt settlement option. This practice involves the actual negotiation of outstanding debts with credit companies. Often companies will agree to take 40-50% of the outstanding balance as payment in full. This option is equally troubled by numerous unethical companies that charge high commission and administration fees while producing little to no positive results. Like debt consolidation, debt settlement can also negatively affect your credit score, but since programs typically last 2-3 years, you can start rebuilding your credit sooner. In general, debt settlement can be a very effective way to deal with debt, as long as the consumer is cautious about which settlement company to work with.
There are many other methods that fall under the definition of debt management, including filing for bankruptcy, refinancing a home loan, obtaining a consolidation loan, etc. The most important aspect to remember is to carefully weigh the advantages and disadvantages of each option. Be sure to choose a program and a company that suits your needs and meets your expectations.
