A Debt Management Plan is an informal agreement between you and the people you owe money to. It often involves you agreeing to make a reduced payment each month for a set period of time and, providing you maintain your end of the agreement, your debts will be considered settled at the end of that period.

Because a Debt Management Plan is informal, an individual is within their rights to attempt to negotiate such a plan with their creditors themselves. However, it is far more common to find individuals recruiting the services of specialist debt management companies in negotiating the plan and distributing the funds to creditors each month. Good debt management companies formulate relationships with major creditors in order to increase their chances of successfully negotiating debt management plans.

It essentially works by firstly calculating what you can realistically afford to repay of your existing debts. This takes into account how much you owe, how much you earn and your living expenses. With this information, a proposal can be put together and sent to your creditors. This is not a legal agreement and, as such, your creditors are in no way obliged to agree to it. But if you creditors accept the proposed Debt Management Plan, you will make a single payment to your debt management company each month. In turn, they will distribute this amongst your creditors.

Debt Management Plans usually last between three and five years.