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What is Debt Management?
A debt management plan or debt management programme as it is sometimes referred to, is a form of debt consolidation. It is basically a way of consolidating your outgoings into one lower monthly payment without taking out a cash loan. The debt management plan is usually an informal arrangement between you and your creditors to allow you to reduce your monthly outgoings and only pay what you can realistically afford, based on your income and expenditure. The amount that you will be asked to repay is normally around half of your existing monthly payments but will depend on your individual circumstances. Consolidating debt in this way will reduce your monthly payments but you will be making payments for much longer and the overall amount that you repay will be greater than if you kept up with your original payments.
You can set up your own debt management plan by contacting your creditors directly or arranging a plan through a debt advice agency or debt management company, however some lenders will be more inclined to deal with applications from debt advice agencies or professional debt solution companies. Occasionally debt management plans can be set up by a court order from the County Court.
Who is debt management suitable for?
A debt management plan may be suitable if:
- Your problem is not permanent
- You owe up to £15,000 worth of unsecured debt
- You are struggling to pay your monthly bills
- You are able to contribute at least £100, each month towards your debt
- You are facing bankruptcy
- You are facing repossession
- You have large amounts of unsecured debt and have fallen into arrears with your mortgage payments
- You do not have enough money to pay all of your credit card, store card and loan bills each month
- You are living off your credit cards for day to day bills and expenditure
- You are coming to the end of fixed rate mortgage and are expecting your payments to increase beyond your means
What are the benefits of taking out a debt management plan?
- Reduce your monthly payments by half
- Only pay what you can afford
- No need to take an additional loan
- May be able to freeze or reduce interest
- If you use a professional organisation they will handle all payments for you
How does debt management work?
The company dealing with your enquiry will assess your ability to repay your debts by looking at your income and reasonable living expenses. By establishing your income and necessary expenditure, the company can calculate your disposable income i.e. what you have left to pay your creditors after paying for the essentials. The debt management company will then prioritise your debts to ensure that the essential items such as your mortgage, council tax and utility bills are paid each month and negotiate directly with your creditors in an attempt to reduce your monthly payments and freeze your interest. You will make payments equal to your disposable income each month and the payments are distributed between your creditors. A professional debt management company will normally keep the first one or two months payments as a set up fee and then keep a percentage, normally around fifteen to twenty percent of your monthly payment as a management charge for administering the payments to your creditors. The debt management plan will run until all of the outstanding debt is paid and this could be a long time.
What can be included in a debt management plan?
A debt management programme will only cover unsecured debt such as an overdraft, unsecured loans, credit card bills, store card bills, catalogues and mail order bills. Debt Management plans cannot be used to cover secured debt such as loans secured on your property or hire purchase agreements like car finance arrangements. Also bear in mind that if you want to include an unsecured debt that you have with your own bank then they may close, restrict or downgrade your existing account. In these instances most debt management companies will be able to set you up a basic bank account with a debit card and there are now a number of pre-paid card cards available to almost anybody.
How much does debt management plan cost?
If you contact your creditors directly or one of the non-for-profit to set up a payment plan then this will cost you nothing other than your time. Most fee charging organisations will retain the first month’s payment as a set up charge to cover the cost of the assessment and contacting all of your creditors and then take a percentage of your ongoing monthly payment as a management charge. The amount will vary from company to company but is usually between fifteen to twenty percent so if you paid in £100 a month towards your debts, the debt management company will keep £15-£20 to cover their costs/make a profit and distribute the rest to your creditors. Some companies however will keep the first two months payments or even spread their costs by taking a proportion of your monthly payment over a period of time. It is important that you fully understand how much you are being charged, when you are being charged and how your money is being distributed. Compare companies before making any decisions and make sure that you understand the costs and paperwork before proceeding.
What happens if my circumstances change?
If you are ever unable to keep up the repayments on a payment plan then the first thing to do is to make your creditors aware, either directly or through a debt management company. If your income has fallen or your expenditure increased it is a case of renegotiating with the debtors. If on the other hand you are luckily enough to have a sudden influx of cash, remember that you can cancel the debt management plan at any time, revert to making the original contractual monthly payments and even ask the lenders for full and final settlement statements to clear the debt in full.
What are the disadvantages of entering a debt management plan?
- Your credit file may show missed payments for the months where a debt management company keeps the first payments. If you are already two months behind with a debt then this may cause you to Default and have an official Default notice registered against you.
- You may have not only Defaults but also County Court Judgements registered against your name which will affect your ability to obtain redit now or in the future.
- Your credit file may show that you have entered into a debt management plan, even if you have set it up yourself, and this may affect your ability to obtain finance now or in the future.
- There is no guarantee that any creditor will freeze or even reduce your interest payments.
- You can still be made bankrupt.
- If you pay a fee to a debt management company then you are using money to pay for a service that could go towards paying your debt.
- Your debt WILL take much longer to pay off.
What to do next?
If you are looking for debt help then before proceeding with any solution you need to ensure that you have fully explored and understand all of the other options available to you. There are a number of non-for-profit organisations that can give you guidance in these areas. A comprehensive list of these organisations can be found at the end of this guide. If you have decided that a debt management plan is the most appropriate form of debt help and best option for you, speak to more than one company to compare the service and cost. Make sure you understand what the costs are and importantly if there are any upfront costs make sure you understand what these are paying for. Most debt management companies and debt solution companies advertise FREE, confidential, no obligation advice so take advantage of this before making any hasty decisions.
Back2009-04-17 15:01:20 © Moneyextra.com
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More Debt Guides
- Debt Advice Trust
- Debt Solutions Guide
- Getting Started with Debt Help
- Debt Consolidation Loans
- Debt Management Plans
- Individual Voluntary Arangements
- Scottish Trust Deed
- Bankruptcy
- Not For Profit Organisations
- Managing Student Debt
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