A debt management plan is an informal debt solution which allows you to repay all of your debt over a longer period than you originally agreed.
You make one monthly payment to one company which is then spread amongst your creditors on a pro-rate basis. The company that is owed the most in unsecured debt will get the most money each month.
Debt management is often referred to as a holding solution, because it’s extremely difficult to finish a debt management plan. This is because it relies on your creditors making allowances that you can’t afford to repay your debt.
So, what is a debt management programme? When I looked into debt management it seemed like a seedy side of the debt industry with every organisation offering a debt management programme with varying fees. However, if every pulls in the correct direction it can be an excellent debt solution.
What do I mean by “pulls in the correct direction”? It’s simple. If the debt management company are charging excessive fees for a debt management programme then it’ll take longer for you to repay your debt, which in turn makes it a lot more likely you won’t be able to repay the debt.
If your creditors don’t agree to freeze interest and charges in a debt management plan then again it’s a pointless debt solution. You need your creditors to freeze interest and charges, or at least a percentage, otherwise you will inevitably be in more debt in the long run.
Finally, anybody entering a debt management plan has to play their part in trying to get debt free. If your creditors agree to freeze interest and charges, the debt management company doesn’t charge you fees but your debt management payments are sporadic then the debt management programme will fail. Furthermore, it’s also important to stop spending on credit when you are in a debt management plan.
Your debt management programme will address outstanding debt, but it’s also a debt rehabilitation programme to help you have a healthy understanding of balancing your income with your expenditure.
Yes, free debt management plans do exist! You don’t have to pay the excessive setup fees and a percentage of your monthly disposable income to a company to manage your debt, you can enter a free debt management plan.
Let’s break it down into small chunks, so you understand why paying for a debt management plan is a bad idea.
If you owe £10,000 in unsecured debt to 5 different companies and can afford to pay £200 a month towards your debt, then if interest and charges are frozen you could be debt free in a little over 4 years.
However, what happens if a company is charging the first two month’s as a fee upfront, followed by 20% of your monthly disposable income each month? Well, it means your creditors won’t be paid for the first two months and the debt will get worse! It also means that instead of 4 years to repay the debt it’ll be closer to 5 years.
- When you start your debt management plan you stop trying to make your monthly contractual payments to each of your debts, instead you only pay the debt management fee.
- Interest and charges are not guaranteed to be frozen in a debt management plan. If the interest and charges are not frozen they your debt will continue to increase instead of reduce, because you will be paying less than your contractual obligations.
- A debt management plan can be cancelled by you at any stage with one month’s notice, consequently you would have to manage the debt yourself. Remember, a creditor can cancel the arrangement too.
- A debt management plan DOES harm your credit file and despite it not being an insolvency solution it will leave a default mark on your credit file for 6 years.
Seek professional Debt Management help
If you think a debt management plan is the right solution for you then you should seek professional debt management help. Your local Citizens Advice Bureau can help. Alternatively you can get information from a debt management charity, such as Debt Support Trust.