What Is a Debt Management Plan?

Debt is not necessarily a bad thing. Sometimes we need or want to make a purchase but can't pay in full up front. Credit can enable us to buy now and pay over time. But when we take on too much debt, it can have a negative impact on our lives.

When debt becomes too much to handle, the first thing we need to do is stop taking on new debt. Then we must find a way to pay off the debt we owe. This can be accomplished with a debt management plan.

In its simplest form, a debt management plan is a budget that focuses on paying off loans and credit cards. It usually reallocates money to make more than the required payment on each debt, allowing us to pay them off more quickly. This frees up more money for savings and everyday expenses and saves us money that would have gone toward interest.

Those who do not have enough money in the budget to increase payments to creditors may choose to negotiate with them. Creditors are often willing to accept reduced payments or lower interest rates for those who are having a hard time making ends meet. They reason that by making terms more favorable to the debtor, they decrease the chances of him filing bankruptcy or simply ceasing to make payments.

Credit counseling services can help debtors establish a debt management plan. They negotiate with creditors on the debtor's behalf, usually getting lower interest rates and payments than the debtor could have gotten on his own. Once negotiations are complete, the debtor sends one monthly payment to the credit counselor, who forwards the appropriate amount to each creditor.

Credit counseling agencies do charge fees, but they are usually taken out of the creditors' money. Creditors agree to this because those who participate in such programs are more likely to pay their obligations in full.

Those who participate in formal debt management plans are usually required to abstain from using old accounts or opening new ones until the program is complete. A note also appears on their credit report stating that they are undergoing credit counseling during this time. But when all debts have been paid off, the note is removed and it no longer affects their credit. If you work out your own debt management plan, there is nothing stopping you from obtaining new credit. However, it's much easier to pay off old debts when you're not acquiring new ones.

A debt management plan can help avoid bankruptcy by allowing debtors to make payments that fit into their budgets. Creditors benefit because they can collect all or most of the principal owed plus interest, and debtors benefit because they do not end up with a serious blemish on their credit records. If you're having trouble making payments but could manage if those payments were lower, a debt management plan could be the answer.