Debt management allows some borrowers to reel in their expenditure and income back to the right balance without resorting to further borrowing. As with all types of debt solutions there are pitfalls to be aware of and this one may not be right for everyone.
If your debts have spiralled out of control and you are struggling to meet your regular minimum payments, your finance company or lender can appeal to the County Court to reclaim what you owe. In cases where the borrower is in genuine difficulty, the court can order the individual to make repayments according to their ability to pay. They will list your debts in priority order, such as where failure to make payments would lead to the loss of your home (mortgage) an essential utility (electricity, water, etc) any essential items (such as a car required for work) or could lead to imprisonment. The court will also consider reasonable amounts set aside for living "essentials" for the borrower and his/her family. After all of these debts and expenditures are taken into account, the court makes a repayment order based on what disposable income remains and the monies owed. The court will also freeze interest so that the money you owe does not accrue further debt.
You can set up your own debt management plan and there is advice available from voluntary non-profit making organisations such as Citizen's Advice Bureaux and the National Debtline as well as online debt calculators and plan management creation tools. However, banks and card lenders tend to look more favourably on applications made on your behalf by debt advice agencies, and whoever chooses this option also finds it reduces the stress associated with debt management. A reputable company should help you understand which debts are essential and negotiate with your creditors on your behalf as many people find this upsetting.
To create a debt management plan you'll need the details of your monthly income and expenditure and what you have left after you have paid your essential debts. A debt management plan can only be used for debts which are considered as non-essential. Essential debts – such as your mortgage - will have to be dealt with and repaid separately.
Once you have established how much you can pay your creditors you will then need to make an agreement with them to pay a small amount of money each month over a fixed period of time based entirely on what you can afford until the debt is completely repaid. This is not a legally binding contract and so you may need to renegotiate the terms with your creditors from time to time. If you do not feel brave enough to do this, a debt management company should provide a structured repayment schedule for your unsecured debts in the form of one amount. This is paid by you directly to the debt management company and then divided fairly between your creditors. This not only prohibits your creditors from hassling you, but you may also benefit from having the interest and charges on your debts frozen so that all monies repaid go directly towards paying off your debts.
Generally a debt management plan will continue until your debts are cleared or until you wish to voluntarily end the arrangement. The most common reason for this latter action is an improvement in your disposable income affected by the plan, enabling you to revert to your original monthly payments.
Most professional debt management companies should incorporate their administration charges – typically around 15% of your monthly contributions - within your monthly payments, although some do charge some fees up front to create a debt plan for you as well as the monthly management charges. There are some voluntary organisations who do not charge you any fees, deposits or monthly administration fees, ensuring that everything you pay goes directly to repaying your debts, hence it is worth taking a good look at all the options if you are serious about putting together a debt management plan.
If you have overspent on your credit cards and you are struggling to meet the monthly repayments, credit card debt management may be a helpful solution to get you back on track. However it is worth noting that you can only use a credit card debt management plan for those debts considered to be non-essential.
It is worth noting that even by organising a debt repayment plan, your credit reference rating will reflect this which could affect your ability to gain credit in the future. It is also worth remembering that your creditors are not bound to accept reduced repayments or freeze interest payments.