How Does a Debt Management Program Work?

A debt management program is a means of restructuring unsecured debt in order that an affordable payment can be made to creditors or collection agencies each month. It is often possible to freeze interest payments and prevent further charges, but this is not guaranteed. A single payment is made to the debt management company (the intermediary) who take their fee before disseminating the remainder to creditors on a pro rata basis. Whilst only a voluntarily arrangement, it helps to prevent further creditor contact.

Choosing the Right Debt Management Program

An important part of choosing an appropriate credit card debt solution is identifying the right debt management company. There are a number of unscrupulous providers who operate purely for the purpose of helping you part with your money. Thorough research is absolutely essential prior to signing-up.

- Check with the Better Business Bureau to see if any complaints have been registered against a company you intend to deal with.

- Find a suitably accredited debt advisory charity, such as faircredit.org. This will ensure an impartial, affordable service is provided.

- Ask friends and family if they are able to recommend a debt management company. There is no better recommendation than from someone you know who has already enjoyed success.

Necessary Information to Set-up a Debt Management Program

A debt management company will need a variety of information in order to make contact with creditors and to help decide what is an affordable monthly payment. Important information includes: creditor name, account number, unpaid balance, rate of interest, minimum monthly payment, creditor address and telephone number. All this information can be found in your creditor correspondence.

Debt Management Program Final Draft

Once all your financial information has been compiled, it will then be possible to determine how much you are able to contribute towards your unsecured debts. A copy of the final draft will be sent via post to your creditors. Although only an informal agreement, it is necessary for all affected parties to sign the agreement. This often involves a negotiation process. Once in-place, a payment is made to the intermediary each month until the debt is fully cleared.

A Debt Management Program is an excellent credit card debt solution as it can substantially improve affordability and stop further creditor contact. As there is no debt write-off, it can take a number of years before you will become completely debt-free. It will also have a negative effect on your credit score.

Disclaimer: This article in no way attempts to provide legal, financial or tax advice. One should consult a licensed attorney, tax advisor, or other qualified financial professional before proceeding.

Updated: 28 March 2011