A debt management plan is a repayment plan designed to pay off debt (e.g., credit card, student, or other consumer loans) within a specified period of time. It sounds more complicated than it really is, so here are specific steps of what you can do yourself if you are seriously committed to reducing debt:
- Make a complete listing of all debts by type (credit cards, student loans, consumer debt, car loans, etc.). Record each debt, payment term, interest rate, and all other relevant information to make financial decisions.
- Create a workable budget and stick to it. You will need your family support for this plan to work, so get all family members on board.
- Contact your creditors; acquire about their internal hardship programs to negotiate the interest rate and set a monthly payment plan. Every creditor has different policies, but most of them will help you work a plan. Many creditors will require you to enroll in automatic bill payment.
- Refrain from applying for/opening new credit cards or acquiring other consumer debts; you might hinder their cooperation with you if you violate your good faith intent.
- Monitor your accounts monthly and celebrate your financial freedom once your debt is paid in full.
- One strategy to control your debt is to understand and apply the rule of 20/10. Your debt (excluding your mortgage) should not exceed 20% of your net annual income, and your monthly payment should not exceed 10% of your monthly net income.
The information about student loans has been drafted from Penn State's Financial Literacy and Wellness Center.