Debt management plans - an overview
A debt management plan is an informal agreement with your creditors to reduce the monthly payments you make so that they fit into an affordable budget. The agreement is informal because it is not legally binding. It is simply a gentleman’s agreement to reduce the monthly payment received. As such, it can be changed by either party at any time.
Clearly, creditors do not want to accept reduced monthly payments. However, if you are truly unable to afford more and are able to justify this, with enough time and negotiation, a debt management agreement can usually be reached.
Over the past few years, debt management plans have become more acceptable to creditors as they do not require any debt to be written off. The debtor still has to pay back everything that they owe.
More and more often, where an individual is struggling to repay their debt and makes it known that they are trying to negotiate a debt management plan, creditors are agreeing to suspend their collection activities to give time for such a plan to put in place.
The advantages of a debt management plan
• Monthly payments are reduced to fit within what you can afford to pay. Therefore you no longer have to Rob Peter to Pay Paul to keep up unrealistic payments.
• If your agreement is managed by a third party, you simply make a single payment each month which is shared between your creditors on your behalf.
• If you are a home owner, you do not have to commit to releasing equity
from your property to make any kind of lump sum settlement.
• A debt management plan is flexible. As such, you can keep one or more debts out of the plan and continue to use and pay them normally.
• The process is informal and therefore discreet. You name is not included in the insolvency register as you have not declared informal insolvency.
The disadvantages of a debt management plan
• Although your monthly repayments are reduced, your debt still has to be paid back in full. As such, the time you are paying back your debts will increase significantly. If you have large debts, this can mean no light at the end of the tunnel.
• Unless you use a third party debt management organisation to help you, you will still have to manage and maintain multiple monthly repayments yourself.
• Your creditors are under no legal obligation to freeze interest or late payment charges. Added interest and/or charges could significantly increase your debt and repayment period.
• A debt management plan will negatively affect your credit rating meaning that you will generally not be able to get more credit while you are in a debt management plan. This will last until all of your debts are repaid in full.
• Because it is not legally binding, your creditors are under no legal obligation to stick to the agreement. They can ask for increased payments or add further interest at any time. You are not protected from any future action that your creditors might decide to make, for example County Court proceedings.
Is a debt management plan suitable for me?
Generally, a debt management plan is ideal if despite the fact that payments are reduced, you can still repay your debt within a reasonable time. The question as to what is reasonable will differ from person to person. However if agreeing to the plan means that you are facing repaying your debt for much more than 5 years, you should seriously consider an alternative solution.
A debt management plan is also useful in the following circumstances:
• If you need a temporary solution
• If you want flexibility to keep one or more or your credit accounts
• If you have significant equity in a property which you do not want to use to repay debt
Because debts still have to be repaid in full, a debt management plan is generally best used to give a temporary breathing space from debt repayments or where the other debt solutions are not suitable.
How much does a debt management plan cost?
The cost associated with a debt management plan will depend on how you decide to implement the plan
• Negotiate the plan yourself - There will be no cost at all except the time and effort it takes to deal with each creditor. Some people are happy to negotiate with creditors themselves. However, others find this stressful and time consuming and prefer the involvement of a third party.
• Use a commercial debt management company – The type of organisation will both negotiate on your behalf and then manage your ongoing monthly payments. Generally these companies will charge an instruction fee of one or two month’s payments and then an on-going management fee of around 15% of your monthly payment.
• Use a charitable organisation –There are some organisations which will undertake debt management services for free. However they are generally not as responsive as the good commercial companies.
Next Steps
A debt management plan may be ideal to resolve your debt problem. However, before you choose to carry out this type of solution, it is important that you understand all of the possible alternatives available.
Reading the rest of this guide is a good place to start. However, the best way to really understand your financial situation and decide on the correct course of action is to speak to an expert.
Beat My Debt provides a free debt advisory service and will be happy to give you advice and guidance. We can be contacted in the following ways:
Email advice@beatmydebt.com
On-Line Forum www.beatmydebt/forum/
Free Phone 0800 077 6180