A Guide to Debt Management

When in deep debts, any wishful thinking that debts will disappear over time might prove to be more disastrous. People who emerge from debt are not just lucky; it is their determination to find a way out that has helped them become debt free. Taking assistance from a debt management company is one of the most effective means to deal with bad debts.

Debt management primarily aims to manage all existing debts in a manner well suited to the debtor. It is extremely beneficial for individuals who are heavily indebted and face problems repaying debts. A debt management plan is put forth by the debt management company according to the needs of the debtor. Reduces worry and stress associated with debt: With a debt management plan, the debtor is assured of reduced debt worries as a panel of specialist debt advisors will assess the debtor’s situation and offer solutions suited for a debtor’s needs and constraints.

Pay Off and Eliminate Debt Forever

If you’re like most people, there’s a good chance you have one or more debts or loans that you’re paying off. This article will look at one way of completely eliminating all your debts, and then hopefully staying debt free.

Most debts can be divided into good or bad debt, depending on whether it is tax deductible or not. You might decide to start with your bad debts before tackling the good debts, however you will eventually want to pay off all your debts, good as well as bad. True wealth comes from your net worth and the assets you own that bring you an income. Financial independence comes from making enough money from your assets to exceed your expenses. Remember, DEBT IS NOT WEALTH. Debt is debt and will eventually have to be repaid.

Firstly, work out what extra money you can put aside to add to your debt repayments. Any extra amount you can add to your repayments will help reduce the debts so much quicker.

Next, compile a list of all your debts. Include your mortgage, car loans, credit cards, store cards, loans from friends and family, school fees, anything that you owe basically.

Write them on a piece of paper down the page or put them into a spread sheet.

  1. Write down what it is, eg. home loan, credit card, car loan store card etc.;
  2. List the remaining balance owed (what is left to repay, not the initial loan amount, so unless you haven’t made any payments yet, this should be less than the value of the total loan);
  3. Then put the minimum monthly payment;
  4. You can also put in the interest rate for your information.

You should have four columns. You will need a fifth column. This is for your debt ratio calculations on each loan to work out your order of repayment.

Taking the first debt, divide your monthly payment into your debt balance. This should give you a number. So for example, if you have a $2,000 loan, and your monthly repayments are $100, the debt ratio is 20.

$2000 ÷ $100 = 20

Now do this for all your loans to give you your debt ratio number for each loan.

Rewrite your list or rearrange your spread sheet in order of the loan with the lowest debt ratio to the highest debt ratio.

This is the order in which the debts will be repaid. What’s important to note here is that the earlier debts to pay off are not necessarily the debts with the highest interest rates. The ratio lists the debts in the order that have the most impact on your cash flow.

Add the extra money calculated earlier to the first debt payments on the list, while still making the minimum monthly repayments on all the other debts. Keep paying off the number one debt on your list, with the extra payment until this one is paid off.

Now, if this was a credit card or store card debt, this does NOT mean that this is now available for spending again. Remember the goal here is to eliminate all your debts, not incur new ones.

In addition, this money is not available for you to spend yet. We’re on the path to financial independence remember, so we will have some short term pain for long term gain.

The entire amount that was used to pay down the first item is now available to be put into the second debt on your debt ratio list AS WELL AS the minimum monthly payment for this debt.

When the second item on the list has been repaid, the entire amount is now used to pay off the third item on the list.

So now the repayment amount is the minimum monthly payment for this debt PLUS the minimum monthly payment for the previous debts PLUS the extra amount you were able to put aside in a bid to actively reduce your debt.

You will find that because you are making extra payments, your repayment time is drastically reduced. You might even find that a debt further down the list which you haven’t gotten to yet, actually gets paid out before you have a chance to get to it, as you are still making the minimum monthly repayments into this debt. If this happens, add this minimum payment to your other debts.

Because you were already making minimum monthly payments to the other loans with just a bit extra into the current loan, you’ll find you don’t even miss the amounts you are directing into the next debt on your ratio list, as you were already making this payment anyway. Now it’s being put to a good purpose in reducing the amount of “dead money” interest you are paying.

Keep doing this until all your debts are repaid. Now, and this is very important, DON’T GET INTO FURTHER DEBT. Keep one of you credit cards if you must, and pay it off IN FULL at the end of each cycle.

Since you didn’t miss the money when it was being used for debt reduction, you can now redirect this “spare” money into your savings and investments.

Take Control of Finances Through Debt Management

You have piled up debts that are threatening to even ruin your life–you are left with little money for daily expenses after paying for the interests and also the sword of repossession of the property dangles over your head. What do you do to come out of this mess? Well, the remedy lies in debt management. You start taking control of the finances once you have decided to go for debt management,

Debt Management is all about bringing back your debts under your control. Any technique that helps in doing so comes under debt management. One popular technique for debt management is consolidation of all debts into one debt. For the consolidation, the borrower takes a loan at lower interest rate and pays off previous debts immediately. As a result the borrower saves lot of money that was going towards paying higher interest rates. This is very effective in managing debts.

In case you are not in a position to take the consolidation loan, then you should opt for negotiating with your lenders. You take a plan of repayment to your debtors and show them how you are going to clear debts. No lender wants to take expensive and time consuming route of repossession of the property. Therefore, debtors may even lower the interest rate, reduce outgo in monthly installments and may increase repayment duration for your comfort. This will give much needed respite from the debts.

But if you do not want to negotiate on your own, to manage debts you need to have a debt management company. Job of a debt management company is to negotiate your debt related concerns with creditors on your behalf. The negotiations include extracting lower monthly payments to the lenders. The company even posts your monthly payments on your behalf. This is very useful in case you tend to forget making timely payments to various creditors. All you do is make a combined payment of your different monthly installments to the debt management company.

A debt management company will also do all the calculations for you to make out how much of payments you have to make towards creditors. So debt management is only a service and should not be mistaken for elimination of debts. You still hold those debts intact despite the debt management service availed.

There are number of debt management companies available online. When choosing a debt management company; make sure it offers credit counseling service as well. Credit counseling is crucial in strengthening you financially. A credit counselor offers you vital tips in making a budget such a way that you not only get rid of the debts but more than that it shows how to stay away from debts in future.

Whatever plan of action you adopt under debt management, stick to it. Never be casual in paying the installments as per the new schedule. Debt management is aimed at reducing the financial burden and that can be done also by cutting your unnecessary expenses.