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How To Develop a Debt-Management Plan
If you find yourself with more bills than your monthly income can cover, one alternative is to develop a
debt-management plan. Completing this plan takes patience, but it works if you really want to get out of
debt.
To set up a debt-management plan, follow these steps:
Find out whom you owe and how much you owe.
Decide how much you can pay back and when you can pay it back.
Set up a plan for paying back your debts.
Discuss your plan with your creditors.
Control spending by sticking with your debt-payment plan until debts are repaid.
Occasionally look over your plan to see if you are keeping up with your debts and your daily living
expenses. If there is a change in your income, you may need to raise or lower your monthly
payments accordingly.
Find Out Whom You Owe
The first step in getting out of debt is to find out whom you owe and how much you owe. Using your
credit statements as a reference, list on the following information about each debt.
Name of creditor
Creditor's address
Your account number
Collateral (property or any other asset that secures a debt)
Balance owed
Remaining number of payments
Monthly payment
Amount last paid
Date last paid
Type of legal action taken (e.g., garnishment or repossession)
Collection agency or attorney
Decide How Much You Can Pay
Once you have listed everyone you owe, determine how much you can pay each creditor and how long it
will take to pay back each debt
Generally it is good to limit the amount of credit you owe (excluding your home mortgage) to no more
than 20 percent of your monthly take-home pay
If your family earns $1,200 a month, try to keep your credit payments under $240 per month ($1,200 x
0.20 = $240). But if you already have numerous debts, figure out a way to use 25 percent of your
monthly take-home pay for paying back your monthly debts. You usually need 75 percent of your income
to maintain your necessary daily living expenses.
A family earning $1,200 a month probably needs to keep $900 ($1,200 X 0.75 = $900) for basic living
expenses. That leaves $300 ($1,200 X 0.25 = $300) for debt repayment. If the minimum monthly
payments add up to $396, for example, you must find ways to increase the money available for debt
repayment.
These options may help you repay debts on a monthly basis
Option 1. Keep a record of your current living expenses for a month. Look for ways to reduce your
expenses so you can use the extra money to clear up debts.
Option 2. Consider selling assets. What assets do you own? Do you have a savings account or stocks
and bonds you could cash in to help pay off your debts? Do you have a television, furniture, stereo, car,
jewelry, or antiques? Could you cash in or borrow against the cash value of your insurance policy?
Option 3. Increase your family income. An extra paycheck will help maintain your present lifestyle while
you pay back your debts. However, additional money does not cure poor management habits.
Option 4. Borrow money. Loan consolidation, home equity loans, or refinancing your home are ways to
avoid repossession or loss of income through wage garnishment.
These options may reduce the amount of your monthly payment. However, the cost for borrowing is
usually increased, because the borrowing time is extended and you may be borrowing at a higher
interest rate. If you can manage to pay your debts without loan consolidation, home equity loans, or
refinancing, you probably will save yourself extra expense.
The use of these options generally does not improve poor money management habits, and the reduced
monthly payment may encourage you to acquire more debts.
Set Up a Plan for Paying Back Your Debts
By now you should have a clear picture of how much money you can manage to pay back and when you
will be able to pay it back. The next step is to decide how much you will pay each creditor and how long
it will take to pay each creditor. Try to set up your plan so you pay your creditors back within
three years.
The debt payment plan can be done in several ways. You may choose to give each creditor an equal
amount. You may choose to pay a larger portion to the creditors you owe the most money--a smaller
amount to those you owe the least. Still, a third method of repayment is to pay back a percentage of the
total monthly obligation based on the amount of money available for debt payments.
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