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Debt Management and Debt Consolidation Compared

A word of caution: What follows is intended for general information only. Each individual case is unique and the purpose of this article is solely to provide fundamental information and points to consider to help readers in further researching what options they should consider. The reader should always be very careful when relying on generic advice and especially that found on the internet.

Debt Management:

Debt Management is a process aimed at helping those with high debt loads work down their debt more easily with reduced monthly payments.

You make an agreed upon monthly payment to the company that runs the Debt Management Plan (DMP) and they turn around and make payments on your behalf to your creditors based on the agrrements made with each one.

Basically, the process involves consolidating all eligible debts into one resulting in a lower monthly payment than the amount that had to be paid on all debts prior to setting up the plan.

Because creditors know that you are working with a debt management company, debt management companies are often able to convince creditors to accept to freeze or lower interest rates, thus resulting in a lower monthly payment. The actual amount varies widely based on individual cases. Be sure to take any claims of substantial reductions (for example 50-75%) with a huge grain of salt. It may sound enticing, but it likely only applies to extreme, rare cases. In many cases it`s marketing hype. Be realistic and research any such claims before getting involved.

To the extent that you have included all your eligible debts, the debt management company will serve as the interface with your creditors, so you shouldn`t be hassled with phone calls or demand letters.

Your current income and expenditures are taken into account in establishing the plan.

Debt management vs debt consolidation:

Debt consolidation – is the process of borrowing enough money from one lender to pay off a number of other debts.

The result of such a move is that you only have one, instead of several, payments to make. Also, where the loan taken out is at a lower rate than those paid off (example credit card debt), then the lower interest savings can result in lower payments. Lower payment can also be achieved if the borrowing term is longer than that of the original debts.

Debt consolidation is based on the premise that you have a financial situation and cash flow that will enable you to qualify for the “consolidated” loan. In other words, you have to be sufficiently creditworthy to qualify for the new loan.

Because of this, debt consolidation is usually out of reach for most people who are struggling under a mountain of debt. If things have reached the point where you’re really struggling to meet your obligations and have little in the way of assets, debt consolidation will likely not work for you.

On the other hand, debt consolidation is a great option to consider if you’re trying to find a way to simplify things and reduce interest rates.

Debt management – as mentioned above, is a way to reduce a borrower’s debts and arrive at repayment plan that is workable.a liveable work out situation without getting another loan.

Conclusion:

Debt management and debt consolidation are just two of several options to be considered. Others are debt settlement or bankruptcy and voluntary arrangements Which is right for you depends on your circumstances.

You should consider your options carefully as making the wrong decision can have a major impact on your financial situation for years to come. Each has pros and cons.

I strongly suggest that you do some basic research on each option and, once you have a basic understanding of each,  consult professionals in your area before making any decision.

More to follow.

MarcL

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