For consumers in dire financial straits, there are a number of debt solutions available that can help them to avoid bankruptcy.
One such solution is a debt management plan, which is an informal agreement between someone in debt and the people that they owe money to. It often involves the debtor paying back less money overall but the advantage for the consumer being that if he or she were to file bankruptcy, the creditors may get absolutely nothing back.
Essentially, the way that a debt management plan works is that an indebted consumer approaches the creditors with an offer. This is often done through a third party debt management company (though individuals may attempt to do this alone). The debt management companies have the added advantage of usually having built up a relationship with the creditors, therefore arguably having more chance of successfully negotiating reduced payments. The offer will take into account what a consumer earns and what their expenses are each month. This means that the amount proposed for monthly repayment is an amount that is manageable and affordable to the individual in debt.
Because this is an informal arrangement, as opposed to a legally binding one, the creditors are in no way obliged to agree to any offer. However, if they do, the usual course of action from then on is that the consumer pays the debt management company a single fee each month, which is then redistributed by the company as appropriate to the creditors.
At the end of the agreed period of time, the debts are considered to be settled in full.
While a debt management plan has the benefits of structuring debt conveniently and even reducing it in some cases, there are downsides too. Again because of its informal nature, the creditors may decide to change the terms at any point. It is also likely, as with many other debt solutions, to show up on your credit rating for 6 years from the date the plan ends.
However, for those who are simply unable to meet their monthly debt repayments, this is a great solution to a bad financial situation.