Debt Management Plans

If you’re working with a credit counselor or a debt relief program, one possibility they may suggest is a debt management plan. A debt management plan, or DMP New Mexico title loan calculator, works like this:

• You choose which debts to enroll in the program.
• You make one single payment to the debt management plan each month.
• That payment is distributed among your creditors, according to the terms of the plan.

Debt management plans are similar to debt consolidation, in that you only have one payment to make. But this type of debt relief program doesn’t require you to take out a loan or open a balance transfer credit card. And, depending on the program, you may be able to get your interest rate lowered or have certain fees waived.

Under the terms of a debt management plan, while you may receive more favorable interest rates or relief from fees, you still repay the entire principal amount owed.

Debt Settlement

Debt settlement is considered an option of last resort. It allows you to pay off debts for less than what’s owed. If your creditor agrees to a debt settlement, any remaining balance is canceled.

This is effectively a type of debt forgiveness, since you don’t have to repay anything more than the agreed-upon settlement amount. Debt settlement is something you can do yourself if you have cash to pay your creditors and you’re comfortable negotiating with them one on one.

There are also debt relief companies that will negotiate for you. This, however, typically involves paying a fee to the company that’s helping you to get loan relief or credit card debt relief.

Also, keep in mind that you typically need to be past due before a creditor will consider settling a debt. So, compared to other debt relief options, debt settlement can be more damaging to your credit score.

For example, if you work with a debt settlement company, they will ask you to make payments to a separate account they set up, rather than paying your individual creditors. This will cause you to be past due with your creditors for a period of time, which negatively affects your credit.

There also can be income tax implications to debt settlement-whether done through a debt settlement company or on your own-because the amount of debt that’s forgiven likely will be considered taxable income.

Debt relief programs can help you get out from under your debt burden. But it’s a decision that needs to be made carefully. It isn’t necessarily a perfect solution and there may be some serious trade-offs to make.

Interest

Debt consolidation loans or lines of credit and 0% balance transfer offers can provide credit card debt relief. But consider the cost involved.

Ideally, consolidating debt results in a lower interest rate. A lower APR means more of your monthly payment goes toward the principal so you can repay your debt faster. You also accrue less interest over your repayment period.

If you’re interested in how to consolidate debt, first consider the rates you may qualify for based on your credit score. And, if you’re interested in something like a debt management plan, ask whether a rate reduction is a possibility when working out repayment terms.

There may be fees associated with some debt relief options and it’s helpful to factor those in when deciding whether the cost is worth it.

For instance, credit counselors may or may not charge a fee to help you create a budget and spending plan. With debt consolidation loans, there are loan origination fees and prepayment penalties to watch out for. If you’re using a 0% APR balance transfer credit card to consolidate debt, then you may pay a balance transfer fee.