People who face a situation wherein their debt reaches uncontrollable proportions are usually referred to debt counseling professionals who will help them come up with a structured plan to pay off their debt. This is what debt management refers to. In the most general sense, debt management is simply a means of straightening out one’s debt problems. Strictly speaking, however, the term debt management is used when a third party is involved in the process. More so, the plan is structured and often, legal proceeding are also part of the process.
When an individual is referred to a credit counselor, the professional will come up with a debt management plan. This plan usually involves only unsecured debts; that is, secured debts (the ones with collateral) are often not covered by debt management plans.
How does a debt management plan work? The credit counselor works with the debtor to compile a complete list of creditors and debts. Looking at this list, the creditors and debts are prioritized, and the debtors assets and income are also taken into consideration. Based on this information, the counselor will propose ways for the debtor to be able to pay off his debts. The creditors will also be consulted and things such as lowering or even cancelling interest charges are also requested.
There are laws governing debt management plans, however, and not everyone is qualified to participate in them. In the United States for example, debtors have to owe at least USD10,000. It is also important to note that participating in a debt management plan can have a negative impact on your credit score.