What is a Debt Management Plan?
In recent years following the credit crunch, many people have found themselves struggling to make ends meet and have resorted to the advice from Debt Management Companies to resolve their growing financial predicament. As a result the debt resolution industry has become a lucrative business however; this has led to some unscrupulous firms becoming involved in improper practises bred from their own financial gain rather than the best interests of their clients.
In May a BBC investigation found that some companies had been holding on to the cash of their clients rather than paying it to creditors, leaving many families worse off if the funds were unprotected and the firm went out of business. Despite the Office of Fair Trading taking a more pro-active approach to the regulation of Debt Management Companies over recent times, it is still important that anyone seeking advice should have a basic knowledge of what their getting into. Read on for a breakdown of what is involved, and some of the more common terms that are used.
Debt management plans are arrangements between creditors and debtors when original contractual agreements have broken down due to unforeseen financial constraints. The plan offers a structured agreement to pay off unsecured debts over a longer period of time, therefore making the incremental payments more affordable to the debtor. The debtor makes one affordable payment each month to the Debt Management Company, who in turn distributes it to the creditors on a pro-rata basis. A Debt Management Plan must not be mistaken for an Individual Voluntary Arrangement (IVA) where some of the debt is written off, however more severe negative credit effects result.
The main advantage of a good Debt Management Plan is it provides breathing space so that debtors can afford life’s essentials, whilst at the same time satisfying the requirements of their creditors. There are disadvantages though as a Debt Management Plan is an informal solution. This means that it is not compulsory for creditors to accept the plan, and some that do will not always agree to all of the conditions. Some may continue to charge interest, and some may refuse the plan altogether.
Debt Management Plans are not always the solution though. It is commonly understood that if the debt cannot be paid off in a reasonable amount of time, a DMP is not the best solution. In these situations legally binding alternatives such as IVA’s might be more suitable. Agreements such as IVA’s and bankruptcy are more restrictive and also are ethically less appropriate. As previously discussed they also effect credit scores for more adversely, however they can see debts cleared in less time.
If you are considering setting up a Debt Management Plan it is possible to arrange yourself and involves providing a physical representation of a debtor’s budget. This will show what money is left over to pay creditors after life’s essentials have been accounted for. It is then possible to approach each creditor individually and discuss making lower monthly repayments. However the procedure can be complicated and extremely stressful. Instead it is possible to use a third party to arrange the plan on your behalf. Debt Management Companies are experienced in negotiating with creditors and by acting as a go-between will take a lot of the stress out of the situation. They do however charge a fee, but this will usually be incorporated into the plan so does not have to be raised up-front.