Debt management, by the standard financial definition, involves a designated third party assisting a debtor to repay his or her debt. Many companies specializing in credit counseling offer plans to help people with heavy debt and damaged credit get their financial situation under control. A simpler definition could be the routine practice of spending less than one earns. For all intents and purposes, however, it is a structured repayment plan set up by a designated third party, either as a result of a court order or as a result of personal initiation.
A plan to manage debt entails a series of steps, which the third party service works on with the help of the debtor. The first step typically involves compiling a list of all creditors and the amounts owed to each. Some creditors are not eligible to be included in a debt management plan, and typically, secured debt such as car loans and home loans are not included.
Once a list of creditors is compiled and the amount of debt is totaled, the debtor’s total income and expenditures, such as mortgage or rent payments, car payments, cost of living expenses, and so forth, are totaled as well. The third party agency assisting with the plan then helps the debtor to determine the maximum amount of money available to allocate to the plan for debt repayment. In many cases, a third party service will attempt to settle some debt amounts and exclude or lower any interest charged during the repayment period. It’s important to understand that participating in a debt management plan will still impact a p0erson's credit score, however, and that any available credit may be inaccessible for a period of time. Further, people who have relatively low amounts of debt not qualify for a third party service.
Since United States bankruptcy laws changed in October 2005, many people find they must participate in a long-term debt management plan because personal bankruptcy is not an option. When privately seeking the assistance of a third party service, consumers make sure that they are registered with the Better Business Bureau, and that they are not charging unreasonable service fees to set up a plan. A small, nominal fee is to be expected, but it should not be based on a percentage of the debt or be a recurring monthly charge. The service should help individuals regain financial control, not put them further into debt.