Debt Management - is It Right For You?
A debt management plan is an informal arrangement that you and your creditors have agreed that will enable you to repay your debts with regular repayments you can afford. There is no stigma attached to it, it does not have as big an effect on your credit rating and there are no legally binding restrictions on what you can and can't do within the plan. However, since a debt management plan is not legally binding, whilst the flexibility may help you repay your debts in the short term, your creditors can still proceed with court action if they are unable to recover their debts over time.
Usually a debtor will involve a third party to negotiate with their creditors to reduce their monthly payments to a more controllable level. This third party could be a debt advisor or a debt management company who specialise in overseeing and distributing an individual's single payment between the creditors to whom they owe money.
It is possible to reorganise repayments into a more convenient plan and this helps in the following ways:
• there's no need to sell the home or car to make the repayments
• there are no lawyers involved
• there's greater opportunity for flexibility with the level of payments.
If you choose a debt management plan to overcome your financial difficulties, you are recommended to assess your current situation and your debts. A debt adviser can help you with this if you are not sure where to start. This will determine the amount that can be reasonably afforded each month once essential outgoings are deducted.
When you know this amount, you, or a debt advisor on your behalf, can tackle your creditors to negotiate with them and agree more manageable reduced payments. It's true that most creditors are content to accept these proposals as debt management companies are generally reasonable and realistic with their suggestions, and they will be receiving something towards the debt you have with them.
By making a single monthly payment to your debt management company, usually via Direct Debit, this amount is in turn distributed proportionally to your creditors. If there are changes in your financial situation during the course of the plan, often the debt company will be able to renegotiate repayments with your creditors for you. Otherwise, your plan will continue until either your debts are cleared or you choose to end the agreement.
Debt Management companies can also negotiate the following on occasions:
• the level of interest on your debts can be frozen
• part of the debt can be written off
In addition, you are legally entitled to keep paying into a pension plan.
Once you have agreed a debt management plan, it's important that you: • Continue to make regular payments on time • Check your creditors are getting paid according to your plan (you'll see this through your monthly statements) • Notify the debt management company or other third party responsible for your plan if you are unable to make a scheduled payment, or if you discover that creditors are not being paid
If you discover that payments are not reaching your creditors in line with what's been agreed, it could cost you more by way of higher interests and fees. You may find your creditors may not forgive any more late payments which will have an unhealthy affect on your credit report.
Any form of debt management is unlikely to solve long term financial problems until or unless individuals learn to manage their debts better. There are other downsides too:
• Your creditors may not accept reduced payments
• You'll be lengthening the repayment period for your debt
• Your credit rating will detail your current Debt Management Plan
• Interest charges are not usually stopped
• Most debt management companies charge a fee for their services.
If your financial problems are likely to improve in the near future, a debt management plan may be a good idea. However, if this is not the case, this type of plan may not help at all. Worse, payment of fees charged by a debt management company and continuing interest payments could mean that your debt will actually increase instead of reduce, which would be disastrous.
It's easy for many to claim that easy credit has caused their financial problems. But having access to credit has no correlation to how an individual chooses to spend it. Being responsible with finances is the answer. If you are unable to meet your debts, it is recommended that you tear up your credit cards, face up to your debts and live to a budget that you can afford, and be aware of where your money is spent.