Beating Broke

Personal Finance from the Broke Perspective

What is a Debt Management Plan

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As you no doubt know, this is a blog about personal finance with a leaning towards getting yourself out of debt, staying out of debt, and learning how to handle the money you make once you’re out of debt.  There are lots and lots of ways to get out of debt.  My personal favorite is pretty close to the Dave Ramsey “Total Money Makeover” method.  Not everyone is willing or able to go “gazelle intense” and bust their debt down to nothing the TTM way though.  For some, they’ve gotten so far down into that debt black hole that they just don’t know where to start.  Those people will, more often than not, end up at a bankruptcy hearing long before they’ll be exclaiming “I’m debt free!” on the radio.

But, if you’re one of those people, there’s one last stop on the debt freefall before you declare bankruptcy.  Call it a last ditch effort if you will.  That stop is a Debt Management Plan.  Too often, the DMP is associated with shysters posing as financial advisors who promise to get you out of debt, while loading you up with fees on the backend.  The problem with a DMP that charges fees is that you are actually adding on extra debt as you try and pay off your debt.  But, there are some reputable places that do offer a free debt management plan.  There are some that will help you to pay off your debt without going into further debt and without declaring bankruptcy.

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What exactly is a debt management plan?  The administrator of a DMP acts as your agent.  They contact all of your debtors, like credit cards, auto loan lenders, etc…  and negotiate a payoff schedule with a payment that you can afford.  Usually, that payoff schedule will include some pretty significant drops in the interest rate as well.  You make one large payment to the DMP agency, and they distribute the payments out to your debtors.  At the end of the DMP, you’ve paid off all of those accounts.  Any good DMP will require that you don’t add any new debt while on the plan.  It also will include at least a minimal amount of counseling to help you avoid getting back into debt when you’ve finished with the debt management plan.

A debt management plan isn’t perfect.  It’s not the ideal way to get rid of debt, but for some, who are having issues getting their debt under control, or, issues making all their payments, they can be a valid way to go about doing so without the pain of bankruptcy.  Your credit will still take a hit, however.  Not nearly the hit that a bankruptcy would deliver, but the accounts will get reported as being negotiated.

In the end, if your choice is between a debt management plan and bankruptcy, I’d take the DMP any day.

Debt Consolidation Loans: What, When, Why

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Many of us have heard of debt consolidation loans.  Some of you might have even used one before.  They’ve gotten a bit of a bad rap over the last few years because they get associated with debt consolidation companies, some of which can be a bit shady.  But, they aren’t all bad.  And, in some cases, they can be a very useful tool in your debt repayment strategy.

Debt Consolidation Loans: What Are They?

The concept is actually pretty easy to grasp.  As the name implies, a debt consolidation loan is a loan that consolidates all of your other debt and puts it all under one single loan.    Depending on the lender, you can consolidate just about any debt.  We’ll talk about some of the things you might not want to consolidate in later.  For many, the prospect of trading their high interest credit card debt for a lower interest rate loan can be very enticing.

Debt Consolidation Loans: When Should They Be Used?

While you can get a consolidation loan at any time, there are a few times when they are of the most use.  The most common of these is when you have several credit cards that have high balances and higher interest rates.  As we all know, paying only minimum payments won’t get us very far, but having several cards to pay sometimes leaves us with little left over to pay extra towards those balances.  A consolidation loan can reduce the interest rate, and reduce the payment amount, making it easier to pay extra on the balance. One of the biggest factors to determining if you should use a consolidation loan is your resolve to stay off the debt treadmill.  If you can’t commit to not adding any more debt, you’ll only find yourself worse off in the long run.Bank Debt Word Cloud

Debt Consolidation Loans: Why Should They Be Used?

A debt consolidation loan can be a great tool when you’re working on paying off your debt.  The reduction in interest rates and payments can help ease the burden of your debt while also enabling you to pay off the debt at a quicker rate.  Again, if you aren’t committed to not adding any more debt, and you start using those same credit cards again, you’ll find yourself in a much worse situation than you were before.  Combined with a commitment to no more debt, they are a great tool.

Debt Consolidation Loans: Caveats

With anything, there are a few things that you’ll need to watch out for.  Besides reloading your credit cards, that is.  Some lenders will attempt to roll a car loan or a home equity loan into the consolidation loan.  Only do that if there is no other option.  Why?  Both the car loan and the home equity loan are what are called secured loans.  There is some physical asset that the lender holds title to should you default.  If you roll either into the consolidation loan, you don’t own that physical asset until the consolidation loan is paid off.  Consider this example.  You have a car loan for $5000, on a car that has a value of $10000.  You roll that car loan into your consolidation loan along with $20000 in credit card debt.  The total for your consolidation loan is then $25000.  Until you pay that $25000 off, the lender will keep it’s lien on the car.  What if you get in a wreck and total the car?  You can’t use it as a trade-in, or sell it to a salvage yard until that $25000 is paid off and you can get the lien removed from the car.  It’s a hairy situation to be in, to be sure.  All that said, getting an unsecured loan can sometimes be difficult, and depending on your situation, some lenders might require at least part of the loan be secured.  You’ll have to determine if that’s a risk you want to take in order to take ownership of your finances.

Much like any other financial tool, a debt consolidation loan can be helpful under the right circumstances.  Be careful, examine the details, and learn how it works, and you can make sure that it remains that way.

photo credit: Vectorportal

Taking Financial Ownership

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I was reading a story somewhere where a person was being interviewed about their debt.  In the interview, the person was speaking about how they had this credit card debt and how they just couldn’t get out from under it because of all the interest, fees, and other ways that the credit card company throws on the heap each month.  They went on to talk about how they were in fear of having their car and house repossessed because they were falling behind.  With each new problem, they were quick to point out the things that were keeping them back and causing their slide into bankruptcy.

Something occurred to me, then.  They were taking no ownership in their finances.  No matter what the financial woe was, it was always someone elses fault.  The credit card companies were tacking on interest and fees.  The bank was adding late charges onto their car loan and mortgages.  Not once did they take any ownership of their situation.  Not once did they say, “we shouldn’t have charged so much on the credit cards”, or “we bought more house than we could afford”. The blame was always on the other guy.

Saving is for wimps! I have a plan for affordable housing.If there’s one thing I’ve learned in my journey towards beating broke, it’s that it’s all my fault.  I signed that credit slip.  I signed that mortgage.  I signed the loan papers.  Yes, some of the credit card companies have interest rates and policies that border on predatory.  Yes, the banks will allow you to borrow right up to a point where you’re living paycheck to paycheck.  But, I signed on the dotted line.  Along the way, I discovered all of that, and I took financial ownership.  And, in doing so, I took control.

Through financial ownership, I have control over where my money goes.  I have control over which debt gets paid off first.  I have control of how tightly the purse-strings are held.  And, most importantly, I have control of my financial future.  A future that I plan to make as financially independent as possible.  Not at the whim and mercy of any bank, but a future where I can plan to buy things, and save money towards retirement.

My journey isn’t over, but I am beating broke.  I’m taking financial ownership and making my future one that is free from broke.

I want you be able to say the same thing.  It’s one of my goals for this site to help you beat broke.  Beating broke is the first step in your financial journey towards a life free from concerns over where next months bills are coming from.  You can do it.  But, you’ve got to take financial ownership.  You got yourself in the situation you’re in, and only you can get yourself out.  Do it today.  Accept that you are the only one that can take ownership of your financial situation, and you are the only one with the power to fix it.  Take that step.

photo credit: woodleywonderworks