The Do-It-Yourself Debt Management Program: A Template for Debt Relief
Are you a “Do-It-Yourself” person when it comes to broken windows or leaky faucets or credit repairs in your home?
Yes, fixing your finances could be as much of a DIY project as tackling window and faucet problems.
Most people look to credit counseling agencies for help when credit card bills, medical bills, and other unsecured debts are dragging them under. Credit counseling agencies often recommend a structured debt management program, a 3- to 5-year plan eliminates debt. In exchange for helping to secure lower interest rates and consolidating your debt payments, they collect a monthly fee (typically around $50).
Can I Set up a Debt Management Program by Myself?
Yes, you can. It starts with calling your creditors and requesting accommodations so you can get ahead of your debt.
Some banks will take your call.
“Chase is committed to providing customers who are experiencing financial hardships with the right solutions based on their individual situation,” says Chase Bank media relations officer Lauren Francis. “We encourage customers to call us to discuss options that may be available to them including but not limited to payment arrangements, payment programs, and debt settlements.
“But at times, we will suggest that customers meet with a reputable credit counseling agency if their financial situation exceeds their ability to pay.”
How to Set Up a Debt Management Program
To set up a debt management program on your own, follow these steps – slowly, carefully and thoughtfully – to eliminate debt problems at home.
- Use a budget worksheet or debt-reduction-spreadsheet to organize unsecured debts by name, balance due, interest rate, monthly payment, and due date. If you don’t know who you owe, get a copy of your credit report from AnnualCreditReport.com.
- In another area of the spreadsheet, organize monthly expenses that need to be paid first such as rent, utilities, food, car payment, student loan payment, child care, etc.
- List all sources of monthly income.
- Subtract monthly expenses from monthly income. What is left is how much you have available to spend on eliminating unsecured debt.
- Call your creditors and explain your dilemma. Negotiate for lower interest rates and monthly payments based on the amount of money you have available. Go back to spreadsheet and note any concessions they make on interest rates, late fees, etc. Keep negotiating if the math isn’t comfortable for you.
- When you reach an agreement, set up an automated payment system so that you don’t miss a payment. Remember: Creditors can cancel any concessions they make if you miss just one payment.
- Search for ways to increase your income. Selling items on eBay, Craigslist, or at yard sales is a good start. Finding a second job (e.g. delivery man, bartender, waitress, etc.) is another option. Use the extra income towards paying down the debt quicker or building an emergency fund.
- Put the credit card away. If your habits don’t change, you will stay in debt a long time. Put the cards away except for emergency or very occasional use. Don’t go “shopping” with a credit card. Have a specific use in mind like groceries or gas. Otherwise, leave the card at home.
Debt Management Plan Example
Let’s review a debt management plan example. Set a goal for how quickly you would like to pay off your debt. Let’s go with five years, or 60 months. Divide your current balances by 60 to calculate how much principal you must pay off each month. For example, if you have $12,000 in debt, you will have to pay $200 a month in principal payments alone to pay off your debt in 60 months.
Now let’s figure out how much you need to add in interest payments to achieve this goal. For an individual creditor, do the same. Consider that you owe Bank of America $3500. The monthly principal payment to pay off your debt in 5 years would be $58.33 ($3500 divided by 60).
After negotiating your interest rates, multiply your new interest rate by the balance for your that creditor. Take this number and divide by twelve. Let’s say you owe Bank of America $3500, and you can negotiate your interest rate down to 9.99%. The balance multiplied by the interest rate ($3500 multiplied by .09) equals $315. Now divide this number by 12 months ($315 divided by 12) equals $26.25. Add the principal and the interest payment together: $58.33 + 26.25 = $84.58.
Now keep in mind that the interest payment will decline each month as your balance declines. You can keep this amount the same to pay off your debt faster, or you can work with an amortization table to modify it each month.
Here is a debt reduction spreadsheet to help you calculate and track your debt management program.
Compare Your Debt Management Program with Nonprofit Debt Management
Find out if you qualify for a debt management program from a nonprofit credit counseling agency, and get an estimate for a consolidated monthly payment. How does it compare with what you were able to negotiate on your own? If your payments are higher than the estimate, that may indicate that you were not able to get the same interest rate concessions as a professional agency. In this case, it might make financial sense for you to pay for a nonprofit agency to administer your debt management program.
If your payments are lower, congratulations. You did the work yourself and saved some money that can be applied toward paying off your debt even faster.
Do-It-Yourself Debt Management: Pros and Cons
It’s up to the consumer to weigh the pros and cons of their particular situation.
On the pro side, you will learn more about your spending habits, some of which may surprise you, some of which will displease you, and all of which is wisdom to be gained.
There is money to be saved, sometimes considerable money, if you successfully negotiate with the banks, you might get interest rates reduced and eliminate fees. Creditors and debt collection agencies will stop calling you once you start making regular payments. It will take a while, but as long as you are making and not missing payments, your credit score will improve.
Finally, there is a great deal of anxiety when debt hovers over you like a thunderstorm. There is a great deal of relief when it starts going away and even more when you’re the one making it go away.
However, there are considerable cons.
It starts with the fact that you won’t receive the free credit counseling offered by nonprofit agencies. Nor will you receive help budgeting your expenses properly, so there is enough money to pay down the debt.
Beyond that, some things make a DIY DMP a questionable move:
Are you familiar with how a debt management program works? If not, do you have time to teach yourself?
Do you know where to get a credit report that lists everyone you owe and how much?
Do you know all the decision-making people in all the financial institutions you owe money to?
Can you create a budget that takes care of necessities like food, rent, utilities and transportation, but leaves room for an affordable monthly payment to eliminate your debt?
What happens if your calculations of how much you can afford to pay every month are inaccurate? What happens if an unexpected expense appears and your expenses suddenly shift much higher?
Are you able to persevere through what usually is a 3- to 5-year process? Will you look for the cause of your problems and take corrective action along the way?
Will you be conscientious enough to make the payments on time, every month? Creditors will cancel the concessions they made in agreeing to a payment program if you miss even one payment.
Credit counseling agencies do all of that – pro and con – and though you have to pay them, it’s a nominal fee when you consider the time and work involved.
As is the case in all DIY projects, be careful. This will be a time-consuming project and just like the DIY plumber who floods the house when the pipe he repaired a day earlier goes bust, there is a chance that things won’t work out. In this case, mistakes could cause a major eruption in your finances that drowns you in more debt.
“Each bank has a different policy and each case has to be considered on an individual basis, but customers might get a better answer if they go directly to a bank,” Nessa Feddis, deputy chief counsel for the American Banker Association said. “It might depend on what kind of history they’ve had with the bank and the situation they’re in.
“If this an aberration because they lost a job or just went through a divorce, that is something they’ll take into account. It’s also a positive if you have a checking account, or have taken out a car or home loan. These are things that might work in their favor as far as getting a positive resolution.”
- NA, ND. Coping with Debt. Retrieved from https://www.consumer.ftc.gov/articles/0150-coping-debt#self-help
- O’Connell, B. (ND). 7 Tips For The Do-It-Yourself Debt Manager? Retrieved from http://www.investopedia.com/articles/pf/08/debt-management.asp
- Johnson, A. (2016, May 5) Save money and your score with a DIY debt management plan. Retrieved from http://www.creditcards.com/credit-card-news/do-it-yourself-debt-management-plan.php