Debt Management Plan
Debt Elimination Program
Debt elimination program summary:
Your options for reducing or getting rid of debt run from DIY solutions to professional help.
Some programs reduce what you owe, while others can eliminate debts entirely.
The best debt elimination program for you depends on your specific situation.
Debt Elimination Program Definition and Meaning
A debt elimination program is a structured plan to help reduce or get rid of your debt. Depending on the program, this may mean creating a detailed repayment plan, negotiating with creditors to pay less than you owe, or using bankruptcy to eliminate debts.
Types of Debt Elimination Programs
Your plan to take care of debt could take a variety of shapes. Here are a few common methods:
Credit counseling. As part of a debt management plan, a nonprofit credit counselor can help you organize your finances, build a budget, and deal with your debt.
Debt management plan (DMP). Your credit counselor may suggest a debt management plan if you qualify. This involves making a single monthly payment to the counseling agency, which then pays your creditors. A DMP can also involve the counselor negotiating with your creditors to reduce your interest rate and/or waive fees.
Debt snowball method. Paying off debt using the debt snowball method means making all of your minimum payments, then putting all of your extra cash towards your smallest debt. Once that's paid off, you focus on the next smallest, and so on. Each debt you eliminate helps you stay motivated for the next one.
Debt avalanche method. The debt avalanche method is similar to snowball, except instead of focusing on your smallest balance first, you tackle the debt with the highest interest rate. This method could save you money over time because of the potential to pay less in interest.
Debt settlement. Debt settlement involves negotiating with your creditors to get rid of your debt for less than you owe. You can negotiate on your own or hire a professional debt settlement company.
Bankruptcy. Chapter 7 bankruptcy could be an option to eliminate some or all of your unsecured debts (like credit card debt). You may have to sell some of the things you own, but you could come out with little to no debt left. Chapter 7 bankruptcy has maximum income limits. If you can afford a payment, you might not qualify.
How to Choose a Debt Elimination Program
Each kind of debt elimination program has its pros and cons, so consider them carefully before deciding. You also need to think about the cost—both in money and to your credit score.
When considering costs, think about program fees as well as how much debt you need to eventually repay. Some methods involve paying off all of your debt, while others could reduce what you owe.
Several debt relief methods could have a negative impact on your credit scores, sometimes for many years. Consider how to balance the credit impacts with your need for financial stability, and your plan to rebuild your credit when the time comes.
Debt Elimination Program FAQs
How long does it take to pay off debt?
If you attack your debts aggressively (not including the mortgage) it's possible to pay them off in two to five years. If you are paying an installment loan as agreed, the payoff time depends on the loan's term. A 30-year mortgage takes 30 years to pay off unless you make extra payments.
What’s the fastest way to pay off debt?
If you want to know how to pay off debt fast, you might ask a debt consolidation lender, a credit counselor, a debt consultant, or a bankruptcy attorney. Here are the timeframes for each option:
Debt consolidation does not pay off your debt. But by replacing high-interest debt with low-interest debt, you may clear your balances faster. Pick the debt consolidation loan with the lowest interest rate, then choose the shortest term you can afford.
Debt management from a credit counseling company typically takes four years. Note that debt management plans do not reduce what you owe. Debt management can fail when participants can’t afford the monthly payment over several years.
Debt settlement: According to the American Fair Credit Council, “Clients generally see initial account settlements within 4-6 months.” It typically takes two to four years to graduate from a debt settlement program.
Chapter 13 bankruptcies take three to five years to complete, but most filers have to make payments for five years.
You may be able to get debt-free with a Chapter 7 bankruptcy in four to six months after filing.
Are there credit card debt forgiveness programs?
If you’re struggling to repay your credit card debts, here are some options to explore:
Debt settlement or debt resolution: negotiate with your creditors to pay less than your outstanding balance. You can negotiate on your own or get help from a reputable organization.
Debt management plan: work with a credit counseling agency to create a repayment plan. They can negotiate a lower interest rate with your credit card companies.
Bankruptcy: this might help you get a payment plan or get rid of credit card debt. But you may have to give up assets.
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