Debt Settlement Plan and Debt Management Plan
Your home is very important. It’s the place you have shared many wonderful memories with your loved ones. The mortgage on that property is the most important financial commitment you have. Once you take out a mortgage, the lender gets a claim on your home. In case you fall into arrears, the lender might eventually seek to repossess your property.
If you are facing difficulties in repaying your mortgage, even if you aren’t in arrears, it’s wise to seek advice from a professional. Delaying the mortgage repayments results in arrears build up that will worsen your situation. Your lender’s main objective isn’t to repossess your property; the institution simply wants you to continue repaying your mortgage. Repossession is the last resort.
Fortunately, you have a few debt management options rather than losing your home. This write-up offers useful advice that can help you take control of your personal finance and be in a position to make your monthly mortgage payments seamlessly.
Debt Management Plan
This is a service offered by credit counseling agencies. It provides customers with a simple payment plan and debt relief from costs of interest. Credit counselors are usually non-profit organizations aiming to assist individuals facing financial stress.
How it works
The first step a credit counselor will undertake when you visit is to evaluate your situation and advice you on the best way of dealing with your specific money problem. In addition, they will assist you in making a budget that you can work with. If you are so deep in debt such that expense reduction and budgeting is not helpful, your credit counselor meets your unsecured creditors to lay out ways of managing the debt. Consequently, you provide your agency with regular payments that are distributed to your creditors as per your debts.
With a debt management plan:
- The debtor repays the entire debt although some debt may be forgiven by creditors
- The installments are usually paid to creditors over a period not more than five years and not less than four years
- In many debt management plans, creditors agree to slash the debt’s interest
- The plan may not include all of your creditors
- The agreement between your credit counselor and the creditors is not legally binding. It is a gentleman’s agreement.
- Now that you know what a debt management plan is, let us examine a debt settlement plan.
Debt Settlement Plan
Unlike a debt management plan, for-profit organizations offer debt settlement plans that include negotiations with your creditors, so that you can pay a ‘settlement’ that will resolve your debt. Payment of this settlement is via installments that finally form a lump sum, which goes to the creditors.
How it works
When you visit a debt settlement company, they ask you to stop further payments to your creditors, thereby encouraging these creditors to work out a deal with the debt settlement firm. As a result, the debt settlement company will advise you to build a lump sum with them and not to contact your creditors.
With a debt settlement plan:
- There are many risks involved as you are dealing with settlement companies that are usually not accredited
- Your credit card score reduces due to defaults advised by the settlement company
- Some creditors accept it, as they prefer a lump sum instead of you paying nothing due to personal bankruptcy.
- The debt settlement company takes a percentage of the monthly payments by the consumers, as fees for negotiation and legal work.
There you have it. Illustrated above are the DSP (Debt Settlement Plan) and the DMP (Debt Management Plan). Both of these plans will reduce your debt even though the approaches of debt reduction are quite dissimilar.