Financial Resource

A debt management plan can be a very effective way of dealing with a personal debt problem. However, beware that the debt repayment period will be significantly increased and your debts could therefore remain payable for many years.

One of the key steps to resolving a debt problem is to reduce the payments you make to your creditors each month to an affordable amount.

Such action stops you making your debts any worse and gives the creditors regular payments which reduces the number of collection letters and phone calls you receive from them.

These benefits can be achieved by using a debt management plan (DMP). The plan is based around negotiating reduced payments with each creditor to fit within the budget that you can afford.

However, it is very important to understand that the money you owe still has to be paid back in full.

Repayment period increases

Because there is no agreement with your creditors to write off any of the debt that you owe, implementing a debt management plan will mean that the time it takes to repay your debt will increase significantly.

To get a good idea of how long the repayment period will be, you need to divide the total amount of debt that you have by the new amount you are repaying each month in your plan.

This will give you the total number of months you have to pay. Dividing this figure by twelve will give you the repayment time in years.

So for example, if your total debt is £20,000 and you are paying £180 per month into your debt management plan, it will take approximately 111 months or just over 9 years to repay your debt.

If you do this calculation before starting a debt management plan, you will get a good idea of the debt repayment period you will be facing. However, you must also be aware of additional factors which will affect this.

Interest and late payment charges

Additional interest and charges will increase your repayment period still further.

If you start a debt management plan, here is no legal obligation on your creditors to freeze interest or late payment charges.

Very often, once regular payments are being made, charges will be frozen. However, this will not be immediate and you must anticipate that your overall debts will increase by at least a certain amount because of added interest.

In addition, if you are using a debt management company to help you manage your plan, they may well charge for their services by deducting an amount from your payment each month.

Given not all of your payment goes to your creditors, this will slow down the rate at which your creditors are paid.

You can get a good idea how long it will take to repay your debt using a debt management plan by simply dividing your total debt by the amount your creditors will receive each month.

However, because you cannot guarantee if and when all of your creditors will stop interest and late payment charges, it is very difficult to accurately predict the actual duration of a DMP.

Generally a DMP will significantly extend the debt repayment period and it is very important to understand this when deciding whether or not to use this type of solution.

Generally, if you calculate that it will take much longer than five years to repay your debt using a debt management plan, it may only be sensible to proceed if you anticipate your circumstances improving in the short term.

If this is not the case, you are likely to face a lengthy repayment period with very little light at the end of the tunnel. In these circumstances, it is worth considering alternative solutions such as an individual voluntary arrangement (IVA).

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