What Is Debt Management?

Before the recession, most consumers paid more attention to how the “managed” their credit than how the managed their debt. Many people became experts in transferring balances from one zero interest card to the next or using their credit cards to pay all of their monthly expenses to earn maximum rewards. Not all people mastered the ability to manage their credit properly. Those individuals are now facing the difficult task of managing their debt. In the world of personal finance the words “debt management” can have two different meanings. Here we will explore the differences between each definition.

Debt Management (General Definition)

Consumers trying to get their finances back on track often practice debt management strategies to reduce high interest debt. This definition of debt management refers to the general practice of “managing debt”. This can include spotting and eliminating bad money habits, recognizing signs of financial distress, paying bills and strategies to pay down debt. When used as a general term, debt management is something all consumers can do on their own to improve their overall financial situation.

Debt Management Plan

The second definition of debt management refers to an actual Debt Management Plan (DMP) which is a structured repayment play determined by a third party company and your creditors. A debt management plan is designed to help consumers who are unable to eliminate debt on their own. Credit counseling agencies are usually the third party company that negotiates with your creditors to reduce interest rates and waive fees and penalties. In addition to providing educational tools which help clients learn how to better manage their finances, credit counseling agencies will set up a debt management plan which outlines how much your monthly payment will be and how long it should take to repay your debt. Clients enrolled in a DMP pay a fee to the credit counseling agency who in turn determines and collects one monthly payment from the client. Once received by the credit counseling agency that one monthly payment is then allocated to each individual creditor (or account) enrolled in the program.

By helping consumers manage and repay their debts on time- each month, DMP’s can be beneficial to clients who need help managing their finances by reducing the amount of interest that is paid on each account. Lower interest rates make it possible for more money from each payment to be applied toward your actual balance. Structured repayment plans in conjunction with credit counseling have helped many consumers get their finances in order and make debt more manageable.

The term debt management is a generalized description of actions taken by consumers to manage their debt and improve their personal finances. Conversely a debt management plan is an actual repayment strategy designed by a credit counseling agency who in turn negotiates more favorable terms on credit card accounts while collecting and distributing client payments to the appropriate creditor. If you are committed to eliminating debt consider if you are able to manage your accounts successfully on your own or if you need the help of a third party company to determine which type of debt management is right for you.