What Is Debt Management

Once you find yourself up to your neck in debt, you may need a debt management plan to help you keep your head above water. Debt management essentially means that you negotiate with your creditors a repayment plan where they may get lower amounts than the minimum they would have wanted. Usually, negotiations for a debt management plan are handled on your behalf by a third party, such as a debt advice bureau.

Together with your debt manager, your financial situation undergoes intensive assessment. You will be asked to provide information about your monthly income, expenditure, and a list of your creditors and amounts owed. The list of creditors should include everyone, from unsecured credit cards to mortgages and secured loans. The aim of the exercise is to determine the realistic amount that you can spare for payments on your debts. Once that is done, the debt manager negotiates with your various creditors to convince them to agree to the reduced payments.

The essence of the argument is that you are perfectly willing to pay the whole amounts of your debt but you cannot come up with the whole amount that is needed each month. Instead you are proposing that you pay only a certain amount until your situation improves.

Although they may not publicise it, many creditors will agree to such debt management plans, provided your debt manager is someone they can trust. It is better for them that they get payments from you than none at all, and that despite your difficulties you are still indicating your willingness to pay the full amount of your debt, albeit you need more time.

Once creditors accept your debt management plan, you make single monthly payments to your debt manager and they take care of distributing your payment to your creditors, usually on a pro rata basis. The debt management plan continues until you have fully paid and cleared your debts. If you choose to terminate the agreement, you are perfectly free to do so. Normally, people end their debt management plan because their circumstances have changed for the better and can already afford to pay down their debt at the original levels of payment.

Your debt manager will likely try to ask your creditors to freeze the imposition of, or reduce, the interest charges on your debt in order to make it easier for you to settle it. In effect, that is asking them to forego their profit on your loan and to recover only the principal of the amount lent to you. Not all creditors will agree to that request, so your debt management plan will be revised to include the interest payment. But other creditors may accept such a request, again if they have trust in your debt manager.

As you may have observed, the role of the debt manager is crucial. The manager's skill is needed to figure out all your finances and develop the debt management plan. The manager's reputation amongst creditors in the industry is also critical to make your debt management plan acceptable, especially the part where you are asking for a no-interest accommodation during the debt management period.

Not all organisations that offer debt management services can be relied upon, so you must be discerning in your selection. Some organisations offer their services for free, since they operate as not-for-profit entities and receive support funds from elsewhere. Some firms, however, do charge fees and these may be high or are not fully disclosed to you.

It is the duty of the debt manager to distribute your payment to your creditors — all of it. But some firms may not do that. You should thus keep track of your payments and your monthly statements to check that your creditors are receiving the payments indicated in your debt management plan.