A debt management plan is an agreement between the debtor and the creditor for a reduced monthly payment plan. You can have a lower monthly payment plan in essentially 2 ways:
Like several other DIY jobs, some people are more than willing to negotiate with creditors on their own. If you're one of them, then have a look at the next section to know how you can manage debts on your own.
It is best to take action before your debt problems become worse. The longer you wait, the greater will be your problem. Start assessing your financial problem first. You need to know how bad is your financial problem.
Sit down with a pen and paper. Gather all the letters you've received from your creditors. Go through the financial statements and note down how much you need to pay to get out of debt. List the name of creditors, the interest rate they're charging and the minimum amount you've to pay each month.
Once you've realized how much you owe to your creditors, your next task is to determine your affordability. You can do that by calculating your income and expenses. Calculate every penny that you spend in a month. Sometimes, people just forget to calculate various miscellaneous expenses they make in a month. Make sure you don't do that mistake.
You already know how much money you make in a month. Now you know how much you spend every month. This will make you realize if your spending behavior has lead you to your current problems. You need to know where your money is going and how much you can pay in order to get out of the troubled financial waters.
Money becomes more precious when your financial life can crash anytime. Pay only for the necessities (your basic needs), followed by paying off state and federal taxes. Once you've paid for these things, focus on your debt payments. Create a spending plan that will help you take care of your necessary, planned and unplanned expenses.
You won't be able to eradicate your financial worries just by making minimum payments. You've to pay something extra to your creditors. Explore new ways to make money. You can do that by selling items you don't need any more. Next contact your creditors and find out if they're willing to cut down the interest rate you're paying. If you can explain your financial situation convincingly, then your creditors may agree to revise your interest rate as per your affordability. Once your interest rates are reduced, you can start sending the revised amount to your creditors every month.
You've 2 options left when the negotiation process is not successful. Your first option is to start paying down your debts from smallest to biggest amount. This is known as the snowball method.
Your second option is to start paying down your debts from highest interest rate to lowest interest rate. This is more popularly known as avalanche method. In both the methods, you need to make at least the minimum payments to your creditors.