Debt management plans are informal arrangements between a person in debt and their creditors.
Here are the main objectives of any debt management plan….
- To group all creditors together and make pro rata payments.
- To make affordable payments on a regular basis.
- To keep creditors informed and keep lines of communication open.
- To get payments reduced and interest stopped.
- To stop threatening letters and phone calls and halt any further legal action.
- To extend the term of the debt but pay the debt off in full.
Debt management plans can be administered in one of two ways.
1) The ‘Do It Yourself’ approach.
This is where the debtor approaches all their creditors directly, to explain that they are experiencing problems in making their contractual payments and then negotiates a new, usually reduced, payment to pay the debt off at a more manageable rate.
In theory this sounds simple but in fact coordinating this is quite difficult as well as being stressful, becoming more difficult as the number of creditors increase. Keeping lines of communication open with creditors when constantly under pressure to make payments, even if they are only “token” ones, is very challenging for people with financial problems. Most people faced with debt are more focused on trying to work extra hours and not constantly field phone calls from creditors.
However, there are some advantages to the DIY method. For example, a creditor will always prefer to speak to their client in person rather than through a third party. Added to this, payments passed to creditors will be paid directly, with no third party fees added, maximising the amount received by creditors and reducing the time taken to pay the debt off in full.
2) The commercial ‘Debt Management Plan’ approach.
The second way is for the debtor to employ the services of a commercial debt management company to administer a plan on their behalf. They will asses the debtors financial status and approach the creditors with a pro rata payment on behalf of their client. For all this they make a charge, which varies from company to company, but is usually based on a “one off” payment and then a monthly fee, typically between 15 and 20 percent of each monthly payment.
The advantage of employing a third party to manage debt is that it takes the day to day contact with creditors away and passes it on to companies that have recognised agreements with creditors.
Debt Management Plans are one solution for people in debt, but it is important to be aware of the potential pitfalls. Creditors are not obliged to accept these plans, and can if they wish continue to prosecute clients who are not paying. There are also no guarantees that creditors will freeze interest and stop making late payment charges.
Companies offering to help can easily make the prospect of reduced payments and interest freezes sound very tempting.
Here at My IVA Adviser we continually stress that it is very important to look at all alternatives when facing financial difficulties.
Generally, for lower debt levels or for short term cash-flow problems, Debt Management Plans can offer the best solution, but decisions are bound to be affected by the personal circumstances of each individual case.
If you would like to chat with an experienced debt adviser to explore the correct solution for your current financial circumstances, why not call My IVA Adviser on 0800 088 7503 for a thorough assessment of all your options.