Debt Consolidation - What is Debt Management?

Published: 13 November 2008

There is no one answer to this question because "debt management" can mean different things to different people depending on their level of debt and their precise financial circumstances. Essentially debt management is the process of reducing monthly repayments on credit cards, loans and other credit agreements. The aim is to reduce repayments to a level at which they can be made comfortably without impacting adversely on "priority" debts such as mortgage, or rent arrears, essential utility bills, etc. Failure to pay the essential debts may result in repossession, eviction, disconnection, or criminal proceedings against the debtor if they remain unpaid for any length of time. In any case, the process of debt management inevitably begins with an accurate assessment of all monthly expenditure. The assessment can be performed by a debtor themselves or under the supervision of a licensed insolvency practitioner with the prioritisation of various debts as "essential" or "non-essential". What happens thereafter depends largely on how much money is left over if indeed any remains after essential debts are paid.

Debt Management Possibilities

In the best case scenario it may be possible for an investor to contact his or her creditors directly and present to them an informal debt management plan. This typically involves reducing monthly repayments and possibly reducing or freezing the interest charged on the debt as a whole for a limited period. Despite the telephone calls and letters that you may receive from creditors, many of them particularly those that have signed up to the voluntary "Banking Code", are actually quite sympathetic to this approach. It is obviously in their best interest that your debt be repaid in full even if this takes longer than originally anticipated. This type of arrangement is of course not legally binding on either side and is only likely to be a short-term solution, perhaps for 6 months or so. You can, however, turn to the Citizens' Advice Bureau for assistance in preparing a debt management plan free of charge.

If you have debts totalling at least £5,000, at least two creditors and at least one CCJ ("County Court Judgement") already against you, you can apply for what is known as an "administration order" from the court. This is a court order whereby you agree to make a monthly payment to the court. This is subject to a deduction of 10%, to cover administration costs and is distributed pro rata amongst your creditors. In return, creditors are prevented without explicit permission from the court from contacting you or pursuing any action against you for the duration of the order.

If your level of debt is higher for instance over £15,000, you can afford to repay at least £200 per month towards your debt whilst still being able to afford your basic living expenses, then an IVA or "Individual Voluntary Arrangement" may be a possibility. An IVA must be drawn up under the guidance of a licensed insolvency practitioner. Despite its name, an IVA is actually a formal legally binding contract between you and your creditors. You pay off your debts via a single monthly repayment which is calculated to be affordable and realistic over a period typically of 60 months. It may be possible for a percentage of the debt to be "written off" so a debtor may have a realistic chance of becoming debt-free at the end of the 5-year period. On the downside, if your creditors or at least those representing 75% of your debt, do not accept your IVA proposal, you cannot apply again for 12 months.

It may be tempting to pass the handling of an IVA or an informal debt management plan to a debt management company. You then do not have to deal with the court or your creditors yourself but be aware that the charges associated with an IVA, as an example, are already high – typically £4,000, or more – without the inevitable margin added by a debt management company. If you do wish to follow this route, make sure that you understand exactly what you are being offered by a debt management company and check the small print of any agreement. There could be hidden charges and make sure that the proportion of your monthly repayment passed on to creditors is sufficient to adequately service your debt. Debt management is big business but is not as tightly regulated as some other sectors of the financial services industry and there have been several high-profile cases recently of malpractice by seemingly legitimate debt management companies.

View All Articles