How Does A Debt Management Company Work?

Posted byDaniel Tannenbaum | Category Blog | Date 21 February 2016

What is Debt Management?

Debt management, debt relief or debt consolidation companies are able to take your existing debts and provide a plan to help you pay them off. This is not for a consumer that has one or two outstanding loans or credit cards as their services are more appropriate for those with:

  • Bankruptcy
  • County Court Judgements (CCJs)
  • Several outstanding credit card debts, payday, logbook or guarantor loans
  • A spiral of debt

It is very common to fall into a spiral of debt with a reported 9 million people in the UK in ‘serious debt,’ which is more than 10% of the country’s population (Source: BBC News). If you are having a tough month or have some big expenses all of a sudden, you may start struggling to pay off one loan or credit card bill. It then becomes tempting to borrow another loan or credit card to pay that one off, but as the interest rate and late fees accumulate faster than your income, it is very easy to fall into a spiral of debt.

And falling into debt is very stressful, not least the burden of knowing you owe money to people and that your car or property might be repossessed, it also the constant phone calls, text messages, emails, letters and even bailiffs at the door which pile on the pressure.

Debt Management Explained

You might approach a debt relief company or they might approach you. You may even find that if you apply for a loan or credit card and are not successful (may be due a poor credit score), you may be recommended to a debt management firm.

They will start by taking all your outstanding debts and create a debt consolidation plan, putting all your debt into one loan which you will pay off into one account every month. So this saves you having to contact every lender one by one and pay them each individually every week or month.

The debt company will typically negotiate a pay plan with your lenders and ask them to freeze the interest. So that instead of having to pay off the outstanding amount like £100 or £257, you can pay back £5 every week or month and over time, this will clear your debt.

They put all your debt into one loan which you pay off every month and you have money apportioned specifically for food, rent and other necessities.

You just have to make sure that you still have an income every week to pay off the debt consolidation loan – where most of your income will go towards paying off your arrears and the rest will be calculated and apportioned for your food, rent, entertainment and other necessities like clothes.

The company will add a bit extra to your monthly payment and this will be their fee for ‘managing your debt.’


In the example above, you can clearly see the income and essential expenses on the left and the arrears and monthly offers on the right.

The loans are always unsecured, which means you shouldn’t have to put down anything as collateral such as your house or car. So if you are unable to keep up with the plan, you won’t risk losing your home!

Examples of debt management companies in the UK include StepChange (charity), Harrington Brooks, PayPlan and Gregory Pennington.

The Pros

  • Puts all your debt into one loan
  • No more being chased by lenders and debt collectors
  • A systematic way to pay off your debt and eventually be debt-free

The Cons

  • Have to pay a fee to debt management company with some firms charging ‘set up’ fees too – not very convenient for someone with money troubles already
  • Surrender your financial freedom as you are required to keep to the strict repayment schedule
  • Need to keep your job and receive income otherwise you will fall behind on payment
  • Repayment can take years and years to clear

What Are The Alternatives To Debt Management?

Working with a debt management company is not the only solution to handling huge amounts of debts.

Of course, you can decide to create your own debt consolidation loan by organising all your existing debts, arranging a pay plan with every debtor and putting money aside for essentials. You can do this on an Excel spreadsheet too.

Other options are to speak to charities or debt advice services including MoneyAdviceService and CitizensAdviceBureau for some free impartial advice on organising your debt. This includes working with professionals who can help you get out of your sticky situation and attend courses and training on debt management too.


If you find that you are now in a better position of employment, earning more income than previously and need to borrow money, you can consider going to a credit union for a short term loan. These can be found on most high streets and to be eligible, you typically need to work in the public sector such as a nurse, teacher, policeman, fireman or council worker. But the rates are super low as credit unions are not-for-profit organisations. So a £1,000 loan at 26.80% APR will only cost £63.50 after 6 months – which is one-tenth the cost of a guarantor loan.

But if you are going with a debt management company …

Make sure that you read through their terms and conditions. The promise of removing your debt and putting a stop to all the calls and letters from debtors is very appealing but you need to read the small print. Be sure to check the fees you are being charged and also take time to calculate your monthly expenses because you need to make sure that all your essentials are included or you won’t be able to keep up with the debt consolidation plan.

Do not be tempted to go with the first debt company that approaches you as you want to make sure that the one you go with is FCA approved. You can check the FCA register here.