Debt management offers borrowers a way of dealing with the debt that they can no longer keep up with. The thought of lower monthly payments may sound like the most impressive benefit (and indeed it is, for many) but debt management offers other, less quantifiable benefits. For example, it means borrowers can let an expert deal with their creditors.



For many people in debt, this is extremely important. A lot of borrowers end up looking into debt management after months (if not years) of watching their financial situation deteriorate. In other words, they've had some time to grow used to disliking the sound of the letterbox or the phone. When letters and phonecalls tend to bring bad news, the thought of leaving it all to a professional third party can be a particularly appealing one.

As a professional, an expert from a debt management organisation will understand how debt 'works' - the difference between different kinds of debt, the best way to approach different sorts of lender, what kind of repayment plan is likely to win lenders' approval, etc. When they negotiate with lenders, they'll be able to draw on their experience, and hopefully reach a result that'll satisfy both the individual and their creditors.

And as a third party, they clearly won't be emotionally involved in the negotiations. Talking to creditors can be difficult for borrowers, especially if they feel they're always having to 'make excuses' about why they can't afford to pay their bills in the way they agreed. Explaining their situation to someone from a debt management organisation can feel a lot less worrying, as they just need their client to tell them the facts so they can negotiate on their behalf.

So how does it work? When someone first approaches a debt management organisation, they'll discuss their finances: what they owe, what they earn, how much they need to spend per month, and so on.

If they genuinely can't afford their monthly payments to their unsecured debts, the debt management organisation will help them figure out how much they can pay towards those debts. (The fact that they're making smaller payments can show up on their credit report, but it does mean they'll be more likely to make those payments, so they don't get 'missed payments' on their credit report.)

It's a question of working out their disposable income - the amount that's left after they've taken into account all their essential expenses, from mortgage / rent to utility bills, petrol, food, etc. Once they've figured that out, they'll be able to see how much they can actually afford to pay their unsecured lenders.

As long as it's a reasonable amount (and what one lender thinks is reasonable, another might not), the debt management organisation will then be able to talk to those lenders, offering them a pro rata payment per month - an amount that will differ from one lender to the next, depending on how much the individual owes them.

They may also ask them to freeze / reduce interest and charges, so the debt doesn't keep growing (or at least grows more slowly) while they're focusing on repaying it. It's an important point, as repaying a debt more slowly will delay the day the borrower becomes debt-free, and it can also add to the overall cost of the debt, as it has longer to accrue interest.

Lenders aren't obliged to agree to anything, but if they can see that this is the best way of helping the borrower repay their debt at a realistic rate, there's a good chance they'll consider making a few changes to the repayment terms.