Understanding Debt Management

Debt management is a common financial term used to imply the use of a third party to assist a debtor with paying back his or her debt. There are many firms offering debt management services to help people with serious debt and credit problems to better organize their financial affairs. Simply put, debt management can be defined as the practice of spending less than one earns. On a broader perspective however, debt management is a systematic plan of debt repayment, which is established by a third party. The intervention of a third party often comes about from the debtor’s personal initiative, or as a result of a court order.

A debt management program involves a series of procedures, arrived at by the third party in collaboration with the debtor. The initial step usually involves the listing of all creditors and the amount owed to every individual creditor. However, it is important to point out that some creditors cannot be included in a debt management plan, especially secured debts like home loans, car loans and the like.

With the list of creditors and the debt amounts compiled, the total income and expenses of the debtor including rent, mortgage payments, living expenses, car expenses and all other expenditure are summed up. The third party company or agency helping the debtor to manage his or her debt then consult with the debtor, to come up with a viable plan that fits in the income and expenses of the debtor, to draw up a debt repayment plan. Mostly, the third party attempts to settle part of the debt, or to lower any interest charged during the period of repayment. However, it is important to point out that engaging in a debt management program still has an impact on the credit score of the debtor, and he or she may therefore not be able to access any available credit in the period of the debt management plan. Moreover, if the debt is less than 10,000 US dollars, the debtor may not be eligible for debt management services.

In the past few years, and particularly after the repeal of the United States laws on bankruptcy, more people have found it necessary to go for long-term debt management plans. When looking for the help of a third party debt management firm, it is of absolute importance to ensure that they are officially registered by the Better Business Bureau. Additionally, the third party should be charging reasonable fees for their services. Of course, some fee is expected for the services rendered, but this should not be pegged on the amount of the debt, and neither should it be a recurrent monthly charge. This is primarily because these services are aimed at helping the debtor to regain control of his or her financial situation, and not to sink him or her deeper into debt.

Summary

In summary, understanding debt management entails the knowledge of the role of third parties in debt management services, the eligibility of debtors for such programmes, the basic requirements for debt management services and what to look for and expect from debt management firms. With this understanding, it is easier for debtors to make informed choices with regard to managing their debts.