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Debt Management Tips

Tips to break a credit addiction and manage debt in a tougher financial environment.

By
Laura Adams, MBA
4-minute read
Episode #94

Debt Negotiation Firms

The debt negotiation industry is growing rapidly. These companies are not low-fee, non-profit counselors, but representatives who aggressively work with your creditors. Many claim to be able to reduce debts by 50% or more. Be careful when dealing with these companies, as there have been some publicized scams. Look for one that is certified by the International Association of Professional Debt Arbitrators and review fee schedules and contracts closely.

Debt Management Plans (DMPs)

You may be eligible to enroll in a debt management plan or DMP. These are also called one-pay plans, because the agency collects one monthly payment from you. They distribute the money to your creditors after negotiating lower payments on your behalf. If you enroll in a DMP, protect yourself by confirming the plan directly with your creditors. Don’t send any payments to a counseling agency or a debt negotiation firm until you know the plan is legit. I’ll put a link in the show notes to some facts about DMPs from the Federal Trade Commission.

Debt Consolidation

Debt consolidation entails paying off one debt with another debt. This may make sense if you can get a lower interest rate or even a discount on the principal amount of the loan. Loan consolidation may help alleviate pressure with lower monthly payments. But if lower payments are achieved by simply extending the terms of the loan, your underlying debt has not been reduced.

Debt Settlement

Debt settlement is another option if you have cash to offer. You or your attorney can contact your creditor in writing to offer a final cash settlement by a certain date. This is an effective strategy that could result in a deep discount on the debt. Also, be aware that the IRS considers forgiven debt as income subject to normal income tax.

Correct Bad Habits

In the best case debt scenario, you’re credit rating is still good, but you’re simply living above your means (you know who you are!). Debt is usually the symptom of saving too little and spending too much, a deadly combination. Don’t shoot the Money Girl messenger… but there is no magic formula to make debt disappear. The solution is to permanently change your financial behavior by becoming more disciplined with your money. Is it easy? Absolutely not. But the rewards of living life without a credit addiction include much less stress and better sleep.

So, the bottom line on eliminating debt and practicing good money management is what you probably already knew, but needed to hear: Spend less than you make or make more than you spend. Then pay the difference to your debts on a regular basis.

Administrative

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Chi-Ching, that's all for now, courtesy of Money Girl, your guide to a richer life.

Additional Resources:

Consumer Credit Counseling Service

American Consumer Credit Counseling

FTC Debt Facts for Consumers

Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

U.S. Trustees Program - find approved pre/post-bankruptcy agencies by state

More Bankruptcy Information

Debt image courtesy of Shutterstock

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About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlersbook is her newest title. Laura's previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.