What is debt management?

If you’re having trouble paying your bills each month and find managing debt overwhelming, you might need a debt management plan (DMP).

Debt management can help you get control of your finances and save for retirement. This guide will explore how a DMP will affect your credit score, consolidation and refinancing, and how to seek the help of Australian financial counsellors.

Let’s get to the following commonly asked questions:

• What is debt management?
• How does debt management work?
• How do debt management programs impact your credit?
• What are the advantages of a debt management plan?

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Q1. What is debt management?

Are you struggling to pay back your auto loan? If you find your current financial situation suffers from different types of debt, you might need a debt management solution. A debt management plan rolls all your bad debt into single payment plans. 

Important: It can be challenging to make decisions when you’re on the edge of signing a debt agreement. With a credit counsellor at your side, you can ensure debt reduction.

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Q2. How does debt management work?

Essentially, debt management plans aim to help you keep the debt collectors at bay and get your bank account looking healthy again. If you find yourself ringing the debt helpline when facing financial difficulties, ensure you understand your options. 

Debt management plans follow the steps below to help you deal with debt collectors, pay off unsecured debt and overcome that debt avalanche. So, read on if you’re in financial hardship.

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Meet with a credit counselling agency

Most debt management companies will offer financial advice and deal with creditors on your behalf. In addition, credit counselling agencies will perform a debt assessment on your personal finance. 

As a middleman third party, they’ll offer debt advice and negotiate waiving fees and a lower interest rate. The credit counselling agency will then create a plan to help you overcome your debt.

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Create a debt management plan

Dealing with debt by yourself can cause stress, so together with your counsellor, you'll develop a debt management plan. They will negotiate loan interest rates and create a budget planner with realistic monthly payments to get you back on track.

If you want to create your own plan and stave off the debt collection agencies, use the following steps.

1. Use home loan calculators to determine your monthly debt repayments, including secured and unsecured loans. Negotiating with your creditors about lower loan rates could save you a lot of money.
2. Calculate your living expenses, including rent, mobile phone bill and food. Can you remove unnecessary costs?
3. If you have an investment property, determine the expenses eligible for income tax deductibility. Seek taxation advice to save money.
4. Use a savings calculator to determine your super investment amount. Remember, your employer's super contributions could offer some relief if you can access them.
5. Consider any other funds you can spare for your savings account. For example, you may have shares or family trust to consider.

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Pay off your debt

Although many companies offer magic debt relief solutions, the only way forward is to pay off debt. A debt management plan might help you get rid of your overdue line of credit and student loans in the short term. You might consider debt consolidation loans to pay off your credit in one go, and in that case, you should seek help from financial advisers for a consolidated loan.

Note: It doesn’t address the core issue: an overreliance on debt. Of course, there’s nothing wrong with an occasional car loan or home equity loan, but if you continuously have overdue credit card debt, you’ll never be free of your situation.

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Other financing options

Debt management plans aren’t debt solutions. Here are other financing options:

• Debt consolidated loans — paying off your debts with a lump sum personal loan and only making one regular payment.
• Ask your mortgage lenders for lower refinance rates.
• Debt settlement.
• Balance transfer.

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Q3. How do debt management programs impact your credit?

Your credit scores and credit reports might take a hit when you first begin your DMP, as when you close some accounts, it affects your available credit utilisation ratio. However, your bad credit history will increase when you avoid missing payments or potential bankruptcy.

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Q4. What are the advantages of a debt management plan?

Debt management plans are only one solution. The advantages include:

• Financial counselling from a money manager to help you get your debt under control.
• Repayment plans will help you pay back money borrowed sooner.
• Overall improved credit scoring.
• Free from debt, enabling better cash flow, saving money in your savings accounts to grow your super.

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In summary

If you’ve let your debt snowball and don’t see a way out of it, you may want to consider a debt management plan. A debt management plan forces accountability, and with a counsellor by your side, you’ll find the motivation to pay off your debt sooner. 

Better still, you'll learn strategies to cope with debt, so you don't end up in the same overwhelming situation again.

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‍Disclaimer: The author is not a financial advisor and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs, or financial situation.