Debt management is a process in which a debtor and a third party enter into negotiations aimed at assisting a debtor settles his/her debt. This is a service commercially offered by credit counseling companies that offer varied debt management plans that become legally binding debt management agreements for the benefit of those with heavy debt and poor credit scores take proper control of their finances. Any of such plans turns out to be the perfect follow up to debt management. The process can be initiated by anyone with heavy debt or when one is ordered by a court of law to do so.
The first part of debt management usually involves one discussing his/her financial situation with a credit counseling company. It involves a debtor compiling a list of all his/her creditors with corresponding debt amounts. Even so, there are certain debts that credit counseling companies do not accept. Such include secured loans such as car and home loans. Once the total debt has been ascertained, a credit counseling company looks at a debtor’s total income and expenditure such as rent/mortgage payments, living expenses and car payments if any. It is after this that a company helps a debtor in allocating his/her money to fit in a plan that allows a debtor to settle his/her outstanding debt.
Credit counseling companies offer different debt management plans including debt consolidation. As the perfect follow up to debt management, debt consolidation involves a company advancing a loan to a debtor with the aim of making it possible for the debtor to settle all his/her debt. This leaves a debtor with only one loan to service; that advanced by the company. Debt consolidation has its advantages and disadvantages.
Advantages
Debt consolidation makes it possible for a debtor to service only one loan instead of several loans, which provides for peace of mind.
Debt consolidation allows a debtor to service one loan at low interest rate.
Debt consolidation significantly improves a debtor’s credit score.
Debt consolidation provides for proper financial budgeting.
Disadvantages
Debt consolidation does not stop a debtor from using his/her credit card or obtaining another loan. This presents the risk of a debtor maintaining his/her borrowing habit.
There is the possibility of a debtor repaying his/her loan over a longer period of time.
There is always the risk of a debtor losing his/her home in when he/she defaults on loan repayment.
There are no blanket debt management plans that can be said to be the perfect follow up to debt management. Each plan is crafted to meet a debtor’s unique financial situation.