Debt Management

Managing your debt properly is extremely important to the financial wellbeing of your household.  If mismanaged, your household debts can quickly increase until you reach a point where making payments become difficult.

Debt Management Plans

In this publication we're going to discuss self help debt management plans and programs as well as professional services.  This includes a brief discussion of how many of us find ourselves with debt problem sand the magnitude of this problem in the United States.

We're also going to discuss the components of a good debt management plan and what you can expect to happen in terms of monthly payments and potential negative impacts to your credit rating.

Problems Managing Debt

There is a growing awareness that debt management may have more to do with individual behavior patterns than with how much money is in a weekly paycheck.   That's because debt problems are not limited to lower income families - it affects those people with six figure incomes as well.  For some people, the more money they earn, the more money they spend.  And that what's really important is not how much you make, but how much you save.

Credit Card Debt

If you do have problems managing your money then you're just like millions of other Americans that have trouble with mounting debt.  Some of the latest credit card debt statistics indicate that Americans now account for around $915 million in revolving credit card debt.  That's not how much they charge to their credit cards - that's the balance that is carried over from month to month.  So what then are some of the strategies to manage all this debt?

Self Help Debt Management

As a first step, you need to really step back and figure out how you got yourself into this situation in the fist place.  Was there a sudden loss of family income?  Or are you merely living beyond your means?

Next you need to figure out how deep you are in debt.  You need to pull out all your credit card statements and other bills with a balance on them and sort from high to low.  Take out a calculator or open up a spreadsheet and start adding it all up.

Now you need to figure out which balance to pay off first.  One tactic is to start with some of the smaller balances, just to get them out of the way.  Once these cards no longer have a balance on them, put them away - we'll talk about cutting them up later.  Keep up your minimum payments on credit cards with the larger balances on them and try to scale back on your spending.

Dealing with Credit Reports

Once you've got some balances paid off, request a copy of your credit report and take a close look at it.  You should be able to quickly identify errors on the report and you need to correct them by contacting the merchant or retailer.  Once you've got all the errors taken care of pull out those cards with zero balances and close out the accounts.  Cut the credit card into tiny pieces if it makes you feel better.

Now that you've whittled down your debt to just a couple of larger credit cards, it's time to get serious about debt management by creating a fiscal plan - just like a business.   There are many ways to put a budget together; we've offered some budget building advice in our article on Credit Card Debt Elimination.  Another suggestion is to purchase personal finance / budgeting software such as Microsoft Money or Quicken.  If you're a member of MSN's network, you've got access to Microsoft Money already!

Both of these software programs will allow you to create a household budget and then track income and expenses. You can create your budget by looking at old utility bills and credit card statements.  That should give you a good idea of where the debt comes from.  Once the budget is created, you can look at a monthly variance report to see how your actual expenditures line up against your budget.

Professional Debt / Credit Counselors

We've talked about several other strategies in our debt elimination article and the same warnings seen there apply to this situation.  Mounting debt can be a serious problem.  If you cannot set up a realistic budget on your own then you need to find someone that can walk you through the process.  You can look in our article on Christian Debt Consolidation or nonprofit debt counselors for some guidance on finding a good debt counselor.

Professional debt and credit counselors will help you put together a debt management plan.  The goal of these plans is to provide you, the client, with a realistic payback schedule so that you can start to lower the outstanding balances on your accounts.

Effectiveness of Debt Management Programs

Georgetown University's Credit Research Center recently conducted a study of the effectiveness of credit counseling.  That study included ten agencies that emphasized financial education - which is an extremely important component of a good debt management program.  Findings of that study include:

• Delinquent borrowers benefit from early assistance including engaging credit counseling agencies that focus on why the client is in financial distress and how to improve their financial condition.
• Telephone and face-to-face delivery of the initial credit counseling sessions appear to generate equivalent outcomes for consumers in terms of creditworthiness measures taken two years later.
• The creditworthiness of consumers who participated in debt management programs (DMPs) actually improved.

This last point is important because the research showed that consumers who were recommended for a DMP by credit counselors and chose to start payments had a significantly lower incidence of bankruptcy.  These same consumers improved their delinquency risk scores relative to those who were recommended for a DMP and chose not to start their plans.

Developing a Debt Management Plan

So what exactly might a debt management plan look like?  Well the intention of these plans is to satisfy three parties:

• Debtor - make sure the plan addresses the realities of the person in debt.  That is, it's important to provide them with a plan they can meet.
• Creditors / Lenders - those owed money need to be assured they are maximizing the amounts repaid.
• Credit Counselor - even the credit counselors themselves via a "fair share" compensation arrangement with the creditors need to feel confident the plan will work for lenders and debtors.

The process the credit counselor will go through includes a review of your sources of income as well as your expenses in addition to a listing of your outstanding debts.  From this information they can work with you to develop a good debt management plan.

Example Debt Management Plan

A debt management plan, or DMP, is all about balancing the needs of lenders and those responsible for repaying the debt owed.  The plans themselves are structured to allow that debt to be paid back as quickly as possible, while lowering the DMP payments.  The following tables illustrate how that plan might look as well as the savings:

Example DMP Payments

Example DMP Savings

This example illustrates the value of a debt management plan to individuals in that there are savings both in time and dollars.

Debt Management Plans and Credit Reports

Participation alone in a debt management plan cannot ruin a person's credit report.  In fact, the research indicates that DMPs can actually have a positive effect on someone's credit - if they can successfully meet the terms of the plan.

Creditors may report payments as "reduced" or you may also notice a line on your credit report indicating "payments administered by credit counseling agency."  If your credit report already shows a pattern of late or missing payments, then the DMP will have a positive affect on your report by recording a consistent payment pattern.  But if you've got a relatively clean credit report to begin with, a debt management plan can have a short term negative impact.

You see there is a growing awareness that debt management may have more to do with behavior patterns than with how much money is in their paycheck.  Debt problems are not limited to the lower income families.  It also affects those people with six figure incomes.  It seems that for some people, the more money they earn, the more money they spend.  Remember, it is not how much you make, but how much you save that is important.

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