Debt Management


Debt Management Plan is an agreement between the creditor and debtor to lay down the terms for resolving and repaying an outstanding debt. Let us see the need and benefits arising out of the debt management plan. Repayment during normal scenario: During a normal period, the borrower repays the loan within the repayment term at the agreed rate of interest. But the situation may not be always normal. Due to unforeseen financial difficulties, the borrower may find it difficult to repay the loan.

This affects the borrower in the following ways

  1. Irregular/Nonpayment will result in a bad credit history.
  2. This will make it tougher to get new loans
  3. Due to nonpayment, debtor lands himself answerable to legal suits of the creditor.
  4. Nonpayment and subsequent legal action may lead to losing assets like home, car etc.
  5. The debtor has to bear the social stigma for non-repayment of the loan.

Nonpayment of the loan also affects the creditor in the following ways

  1. He might have used the borrowed capital to lend the debtor. Now his repayment and credibility are affected.
  2. Profitability of the creditor is affected
  3. Legal suits are expensive and time-consuming. In spite of these, he has to initiate legal suit
  4. Risk appetite of the creditor is affected. This will impact the business growth and economy as a whole.

Why debt Management:

Debt management is needed when the borrower is not able to repay the debt within the agreed repayment term. This may be due to unexpected reasons like sudden unemployment, business losses etc. Hence the repayment of the loan may not be as smooth as expected. Under such circumstances, a debt management company works out a plan between debtor and creditor which serves as a solution so that the loan is repaid through any of the following:

  1. Reduce outstanding debt: Where the creditor agrees to write off a certain amount outstanding so that the amount to be repaid becomes less.
  2. Reducing rate of interest: The creditor agrees to charge a lower rate of interest so that the EMI gets reduced.
  3. Increasing repayment term: By increasing the repayment term the amount of EMI gets reduced as the outstanding amount is spread across an extended period now.

Benefits to the borrower: Following are the benefits of a debt management plan to a borrower:

  1. Consolidation of debt becomes possible without taking a new loan.
  2. Now that the debt repayment is replanned, payment of other bills will not be affected.
  3. These plans are practical and really feasible. Hence the borrower can lead a stress-free life. Once he gradually repays the loan as per the plan his rating would improve.
  4. Mostly the non-repayment may be unintentional. Hence the borrowers will be relieved of guilty feeling.
  5. These will certainly help the debtor out of the tough situation, whether it be a consumer loan, home loan or an educational loan. This provides relief from the existing situation so that repayment is made easy. Most of the debt management companies are non-profit organizations. They provide the necessary financial counseling. Hence the borrower can feel free to discuss their problems. They use certified financial counselors. Hence getting expert advice for resolving the debt issue becomes easy. Once you discuss your problems, the counselor will negotiate a repayment plan with the creditor and make the things progress. How to prepare yourself for the discussion: As a borrower, it is good to keep yourself prepared for discussing with the debt-management counselor.


    Follow the below things which are important:

    1. Be prepared with all the information on the total income avenues, and the expenses you incur on rent, bills, education, medical expenses etc.
    2. The counselor will verify your existing credit report.
    3. Be open to the suggestions of a counselor on areas of reducing your expenses and increasing your income. Only this will help in solving the issue.
    4. Once you agree, the counselor will prepare a budget for altered repayment and send it to your creditor.
    5. Be prepared with your bank account statements.
    6. Once everything is finalized, the debt management company will send the agreement over mail. This should be signed by the borrower.
    7. Once things are agreed upon, the payment would be automatically initiated from your account to the debt management company who will pay in turn to the creditor.