Financial Resource

Using plans to pay off debt is a tried and tested system that works very well for many people.  Structured plans provide a simple system that allows people to take back control of their debts and gradually become debt free again.  There is more than one type of debt plan available and this article will explain what the differences are between them and how they should be used.

There are two main types of plan that are commonly used to pay off debt.  The ones in most frequently use in both the US and the UK are debt management plans, which involve a process sometimes referred to as debt consolidation.  This is a plan that enables you to consolidate all your debts into one more manageable monthly payment.  There is no additional borrowing involved in this, just a renegotiation of the terms of your debts.

The debt management company that you use to set up the plan will negotiate with all your creditors to make new arrangements for paying back what they are owed.  This will normally mean that there are reductions in interest charges or other late payment fees.  The results of these changes mean that your debts become affordable and you are then able to repay all that you owe.

The other type of plan that is used to pay off debt is referred to as debt settlement.  This is also known as debt negotiation and involves a negotiated settlement with creditors to write off part of the debt.  This is an approach that is used to deal with very serious debt problems, where the person probably would not have enough surplus income to be able to afford the payments on a debt management plan.  It is often a route chosen by people in a real debt crisis as an option which is far more preferable than the usual alternative of filing for bankruptcy.

When you use debt settlement to pay off debt, you make a payment every month into a holding account instead of paying anything to your creditors.  An experienced negotiator will contact all of your creditors with view to coming to agreements to settle each debt for a reduced amount, generally in exchange for paying the rest in a lump sum.  A good negotiator ought to get reductions of up to 60% off your debts, which is what then makes it possible for you to deal with the balance and eventually become debt free.  The amount you pay into the new account is saved up and used towards the settlement payments as new deals are reached with each of your creditors.

It is worth mentioning that UK residents will not come across debt settlement as there is a good alternative that is only available in the UK.  This is an individual voluntary arrangement, commonly known as an IVA.  These are formal agreements which also result in a single affordable payment and a large part of your debts being written off.

The advantages of both debt management and debt settlement (and IVAs) are quite clear, in that instead of having payments due that you cannot afford, you have a single payment that you can afford.  The simplicity of a single payment is in itself a big help to most people.  You also get the huge advantage of having the debt company deal with your creditors for you, so you stop being pursued for unpaid bills.

Once you have an understanding of how this kind of debt plan can be used to pay off debt, you will need to find some companies that can be relied on to provide you with the appropriate plan in a responsible way.  I would never recommend just approaching only one company, otherwise you will not know for sure whether what they are offering you is a good deal or not.  It is always sensible to draw up a shortlist of good companies and apply to two or three.  The application process is usually a very simple online form, and you are under no obligation to accept what they offer you.

The most important thing at this stage is to ensure that you only approach companies that you know to be reliable and ethical.  This is vital because there are unfortunately many companies offering debt plans who will take advantage of desperate people, charging large fees without delivering results.  The safest approach is to follow recommendations for debt companies that are known to be well established and who can demonstrate a history of having already solved the problems of many other people.

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