What is a Debt Management Plan and how does it work?

by | Jun 27, 2022

We’ve all heard this, and similar sentiments before…“ a failure to plan is planning to fail”.

I don’t know about you, but I can’t get through a day without someone on at least one of my various social media channels sharing such quotes, supported by their own pearls of wisdom, and they’re not wrong.

After all, personal growth, self-improvement, and change all starts with a great plan. It should come as no surprise then, that successfully getting out of debt also starts with a great plan, and that’s what I’m going to talk about today.

Two ways of getting out of debt

Getting into debt is too easy, and we have numerous opportunities on a daily basis to do so. On the other hand, getting out of debt is far more challenging. The reality is that there are really only two ways of getting, and more importantly staying, out of debt.

win lotto

1. Win lotto

management

2. Commit to a Debt Management Plan

The bad news is that not only are the odds against you for winning lotto (and believe me I try every week!), but according to a recent story on Love Money “statistics show 70% of lottery winners end up broke and a third go on to declare bankruptcy”

So if you’re really committed to getting, and staying, out of debt – I suggest you focus on Option Two, a Debt Management Plan.

    Stick with me now as I walk you through the following:

  • What is debt?
  • What is a creditor, and what is a debtor?
  • What is a Debt Management Plan
  • How a Debt Management Plan can help you.
  • The 3 steps in an effective Debt Management Plan.
  • How to save between 50% – 100% off your debt.
  • How to get help with your Debt Management Plan.

What is debt?

A good place to start is to get a clear understanding about what debt is.

Debt refers to money that is borrowed and is expected to be paid back at some future date. It is an agreement relating to anything owed by one person to another and can relate to a variety of different things such as a mortgage owed to a bank, money you owe someone for goods or services they have provided, or even if you’ve offered to pay back your friend for that coffee.

You’ve probably heard the term ‘loan’ as well. The terms ‘debt’ and ‘loan’ are often used interchangeably, in this case debt can refer to the sum of everything you might owe to different parties. A loan is a specific agreement for an amount that one party has borrowed from another party, such a personal loan with a bank.

For example, if a person has three personal loans of $10,000 each, that would mean that person has a total debt of $30,000.

What is a creditor, and what is a debtor?

In every credit relationship, there’s a debtor and a creditor: The debtor is the borrower and the creditor is the lender.

If you borrow $10,000 from your mate Brad, for example, you would be the debtor, or the person owing the money, and Brad would be the creditor, the person or party who has lent you the money – a.k.a. the lender.

Now we have that clarified those details, let’s take a look at a Debt Management Plan.

creditor

What is a Debt Management Plan?

Simply put, a Debt Management Plan is a plan to help you paying back your outstanding loans. It includes an arrangement(s) between you (the debtor) and your creditors, that allows you pay off your debts at a rate you can afford. There are many variable factors that need to be considered when developing a Debt Management Plan, as each and every one of us has a unique set of circumstances. Therefore no Debt Management Plan will look the same as anyone else’s.

How does a Debt Management Plan help you?

Having a Debt Management Plan can help you get back in control of your money and stay on top of your financial commitments by simplifying your repayment of any current and overdue loans in the most efficient and effective manner. By being tailored to your specific circumstances, including what you can genuinely afford to pay back without going without any essential items, a Debt Management Plan will take away the stress you might be feeling, as it offers affordable and realistic debt repayment solutions that allow you to sleep easy again at night.

The 3 steps in an effective Debt Management Plan.

1. Know your starting point.

There are two parts to this. The first one is knowing how much and who you owe. The second is to know how much you can afford to pay back by having a really clear understanding of how much you earn, and what your current financial outgoings are, or how much you spend, and on what.

If you’re not sure about how much and who you owe I suggest you get copies of all three of your credit reports which will provide some details, although it won’t tell you how much you owe Brad for that coffee!, check out this page for more information and get in touch if you want some help.

The best tool for working out how much you can afford to pay back in regular payments is a budget or spending plan. If you don’t have one, don’t stress, Fix Bad Credit has your back. Click the link below where you can get your own personal budget template and if you like we can even take you through putting it together. Having an accurate budget or spending plan is a critical step in the Debt Management Plan process. We must get this step right for the rest of it to work, so don’t cheat yourself by conveniently forgetting to include how much you spend weekly on uber takeaway deliveries. Once you have an accurate and honest budget, you can work out how much and how often you can afford to repay your debt.

Again, if you need assistance for any of the above, please feel free to get in touch with the team at Fix Bad Credit.

2. Make debt repayment arrangements.

Now you know how much and how often (be it weekly, fortnightly, or monthly, for example) you can afford to contribute towards paying back your debt, you can contact your creditors to attempt to reach an agreement that you can afford, and that they will accept, for paying back your debt.

There are different ways that people use to pay off debt. Learn more about them here

Negotiating with your creditors can be tricky, and we understand that having to call them can make many people uncomfortable. But, if we were to share with you that during the agreement process there is an opportunity to save yourself time, money and stress, who wouldn’t be interested?

Debt negotiation is something that the team at Fix Bad Credit have extensive expert experience. In fact, with our solid understanding of the legislative consumer rights, and the complex financial regulations the creditor has to comply with, the Fix Bad Credit legal team have assisted many people with debt to save between 50% – 100% of their balance owed.

Check out the video below from Ennes’ who shares how we saved him $60,000 in debt repayments.

If you would like to know how much we can save you

3. Execute

Now you know have reached either formal or informal repayment agreements with your creditors, it is really important that you actually continue to meet the arrangements that you have agreed. Handy financial tools like direct debit can help you ensure that you never miss another payment.

It is important if your circumstances change or you are struggling to make a payment on time, that you contact your creditors as soon as possible to let them know.

Advantages & disadvantages of a Debt Management Plan with Fix Bad Credit

Knowing the pros and cons of getting into a Debt Management Plan will help you make an informed decision about how to best manage your debt:

Pros:

  • We will take care of all the calls, angry emails and threatening visits from debt collectors so you can feel less stressed.
  • We will negotiate with your creditors on your behalf.
  • Potentially reduce your current debt balance, or how much you owe, by between 50%-100%.
  • Potentially lower any interest rates you may have against your loans.
  • Potential waiver of any late payment fees.
  • Potential to protect your credit report.
  • Potential to protect your credit score.
  • Management of your loans under the supervision of experts.
  • Simplify multiple debts into one regular easy to manage repayment.
  • Avoid bankruptcy, or a part 9 or 10 debt agreement, all of which can significantly impact your credit score and credit report for years.
  • Receive financial education and budgeting help from professionals, setting you up long-term for a financially secure future once you’ve paid of your debt.

Cons:

  • Requires strict discipline concerning meeting your monthly or periodic repayments.
  • You risk losing your debt management plan and starting back at the start if you miss some repayments.

Conclusion

Having a Debt Management Plan is beneficial for everyone in their day-to-day managing of debt, no matter how much they owe. However, because everyone’s situation is uniquely different, the benefits of obtaining assistance from Fix Bad Credit with your Debt Management Plan will also vary. The good news is that it costs you absolutely nothing to find out if you might be able to reduce your debt with the assistance of the team at Fix Bad Credit, just like Al did below.

Al came to Fix Bad Credit with 6 figure worth of debt and was considering bankruptcy as an option. This would have impacted his credit score for 5 years and stayed on a publicly available register for life.
Instead we were able to work closely with Al to develop a personal Debt Management Plan with options that reflected his specific circumstances and avoided him needing to get into bankruptcy or a Part 9 or 10. Agreement.

Not only that, but Fix Bad Credit managed to reduce Al’s debt by more than $100,000 while negotiating for the remaining balance to be paid back in affordable monthly payments, with no fees or interest. You can hear from Al himself in this video.

B M Peachey

B M Peachey, has over 15 years of experience investing in property and the stock market, in both New Zealand and Australia. She has a post-graduate degree, with qualifications in Finance and Mortgage Broking and in Accounting and Bookkeeping. She is passionate about ensuring people have access to credible, reliable, and easy to understand information to help them get in control of the life they REALLY want to live.

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    Disclaimer: The information in this article is general in nature as it has been prepared without taking account of your specific objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstance before acting on it, and where appropriate, seek professional advice from a finance professional such as an adviser.