How does debt management work?

Rather than consolidating their debts or thinking about bankruptcy, many people who can`t keep up with their debts join a debt management plan, a professional debt solution that can reduce the monthly cost of their unsecured debts and reduce or freeze interest and charges. Simplifying their finances, this can give them a realistic, affordable path out of debt and back to financial stability.

So how does debt management work?

Debt management works by renegotiating the terms of the borrower`s debts. Lenders may be willing to consider changes to those terms if it looks like this is the best way of recovering the money they`re owed - rather than starting legal proceedings against someone, they may prefer to accept lower monthly payments.

The first step in joining a debt management plan is when the individual contacts a debt organisation, explaining that they can longer afford their monthly debt repayments and asking for help.

The organisation will go over their income and expenditure, helping them figure out how much they can realistically put towards their unsecured debts every month, once they`ve taken into account what they need to spend on essential expenses, from mortgage/rent and utility bills to petrol, food and other unavoidable bills.

If it looks like debt management is the best solution to their debt problems, they`ll be able (once all the necessary paperwork has been filled in) to negotiate with the individual`s lenders, asking them to consider a few changes to the repayment terms that`ll help the individual repay their debts at a rate they can afford.

Can`t I negotiate my own debt management plan?

Of course. Many people choose to negotiate with their lenders on their own, whether it`s because they don`t want to involve someone else in their finances, or because they don`t want to pay the fee that some debt management organisations charge.

Others may choose to talk to debt management specialists because they want their debts handled by a professional. It might be because they`re not confident about their negotiation skills, or about their ability to keep track of their finances, or because they find it difficult to talk to their lenders about money.

Are there any drawbacks to debt management?

If you ever fail to repay a debt in the way you originally agreed to, your lender may issue an official letter known as a default notice, which will stay on your credit report for six years and may make credit harder to obtain and/or more expensive.

Plus, bear in mind that a debt will take longer to clear if you`re making smaller monthly payments. Unless the interest is reduced by enough - or frozen - repaying it more slowly can also add to the overall cost of the debt, as it`ll be accruing interest for longer.