Who are debt management plans suitable for?

Written by admin on December 7th, 2010

A debt management plan is an informal (not legally binding) arrangement between a borrower and their unsecured creditors that involves reorganising how their debts will be repaid.

The aim is to allow the borrower to repay their debts at an affordable rate, making sure they can afford their repayments towards their unsecured debts as well as their essential costs of living. Repaying debts over a longer period of time, however, may increase the overall cost of the debt (due to interest).

The new agreement could involve the creditors accepting lower monthly repayments and/or freezing interest – but please note that creditors are not obliged to agree to any changes to existing repayment plans.

Furthermore, a debt management plan will remain on a borrower’s credit report for six years, which means that during this time, further credit could be harder and/or more expensive to obtain.

Finally, as with any debt solution, it’s important to consider the alternatives before entering a debt management plan. For some people, a different debt solution such as a debt consolidation loan or an IVA (Individual Voluntary Arrangement) may be more suitable.

When would debt management be inappropriate?

Debt management may not be the right approach if:

–    You won’t be able to repay your debts within a reasonable period of time.
–    Your income isn’t steady. This could be the case if you are self employed, or earn commission-based pay.

When would debt management be appropriate?

In most cases – but not all – debt management could be an appropriate debt solution if:

–    You have been unable to sort your debts out through a debt consolidation loan or a remortgage (possibly because of the current economic climate).
–    Your total unsecured debt is less than £15,000 (the lowest amount usually needed to qualify for an IVA).
–    Your monthly disposable income is less than around £200 (the usual amount for monthly payments on an IVA).
–    You can afford to repay your debts in less than 5 years (the typical duration of most IVAs).

How could you enter a debt management plan?

You can, if you want to, manage your debts on your own. However, you will need to be prepared to put in the time and effort needed to negotiate with your lenders (perhaps on several occasions).

Or you could approach a professional debt management organisation. If you decide to do it this way, you will be benefiting from the knowledge and experience which the right organisation will have. The organisation should be used to dealing with creditors, and may have dealt with cases similar to yours in the past.

Whether you work with a debt management organisation ‘go it alone’, your lenders will only accept new, lower, repayments if you cannot afford to make the repayments as laid out in your current agreements.

If you want any further information regarding debt management, you should contact a professional debt adviser.

Tags: , , , , , , , , , , , , , ,

Leave a Reply