Jan/101
What is debt management?
A debt management plan is a structured repayment plan set up by a designated third party, assisting a debtor with repayment of his or her debt. The aim of debt management is to help clear the debts at a reduced level over a fixed period of time to help the debtor make a fresh start with their finances. The client and all their debtors must agree to the arrangement and the client has to be able to meet the requirements.
Deciding to use the services of a debt management company may be hard. It can be difficult for some people to even admit that they need help and many people will wait for their financial life to spiral completely out of control before seeking assistance. Seeking the help of a debt management company early can help you get back in control and assist you towards a debt free future.
A debt management company can help the average consumer take control of their debt problems quickly. They can reduce or eliminate current levels of debt whilst helping the consumer to understand the factors that led to the debt and how to avoid these factors in the years to come. A good debt management scheme can help a consumer create a realistic budget plan to carry them forward in the future once the current debt has been eliminated. Making a monthly budget and keeping to it may well be the most essential financial decision anyone can make, but very few people will take the time to make a budget. Debt management schemes can teach this important skill and also provide their clients with expertise to remain debt free.
How does debt management work?
Firstly a debt advisor will offer advice on ways that you could save money by looking at the way you budget. They can then help you to carry out an assessment of your financial situation and debts by asking you a series of questions. By asking these questions they get a more accurate picture of your finances. It is essential that you are truly honest when they are going through your finances with you to enable the debt advisor to give you the specific help you need. This information is used to calculate how much you can comfortably afford to pay each month out of your disposable income.
Once this amount has been agreed, your creditors will then be approached and asked to cease all charges and negotiate a different repayment schedule with them, which will be easier to manage every month. In most cases creditors are happy to agree to the plans, because they know from experience, that such plans are realistic and sustainable.
You then make a single monthly payment, all of which is distributed to your creditors on your behalf. It is important that the payment is made into your debt management plan every month. Throughout the duration of your plan, you will be able to speak with an experienced debt advisor whom you should contact if you experience any problems whilst the arrangement is in place.
Your debt management plan will be reviewed at regular intervals to ensure that it still meets your circumstances. If your financial situation changes, the debt management company have the flexibility to be able to renegotiate payments on your behalf.
When it comes to reducing and eliminating current debt, a reputable debt management firm can be a very effective way to reduce debt and eliminate all the stresses it causes. While creditors are often reluctant to work directly with consumers to renegotiate the terms of their debt, they are often very willing to work with a legitimate debt management company who know the lingo of the credit card company or the bank. Speaking the same language, they will know how to negotiate the best possible terms on the repayment of a consumer’s debt. Whenever you find yourself in debt over your head, chances are a debt management service can be a big help.
Jan/100
Plans to help people solve their debt problems as quickly and fairly as possible
Debt Management Schemes are designed to assist those who are in debt and are unable to meet their commitments. In these situations finances are assessed and a monthly repayment deal is negotiated with all their creditors which all sides agree to and the debtor is able to maintain.
The consultation explores whether there would be benefits for debtors through:
- more consistent operators’ charges
- interest and other charges being frozen once a payment plan has been agreed
- the opportunity to pay off debts over time without requirements to sell homes or other assets
- protection from enforcement procedures from creditors (unless the creditor receives court permission
- better advice on the full range of options available to deal with debt problems
- changes, if introduced, to existing schemes would also be aimed at assuring creditors that they:
receive maximum returns
will not need to spend time and money on chasing debts
will have clients’ financial details regularly provided to them in a consistent format
will be confident that they are receiving the maximum possible monthly instalment.
Taking tough, swift action against firms who fail to operate within the rules and who provide sub-standard services to consumers with problem debt remains a high priority. Later this year, the Office of Fair Trading plans to launch a review of its Debt Management Guidance to obtain a clearer picture of compliance levels within the debt management sector and take appropriate follow-up action.
Other measures to help consumers and homeowners in financial difficulty include:
- Changes in eligibility criteria for Income Support Mortgage Interest for homeowners getting Income Support, income-based Jobseeker’s Allowance, income-related Employment and Support Allowance or Pension Credit. Where they have a mortgage, those benefits may include an additional element called Support for Mortgage Interest, which assists the homeowner with the interest on their mortgage.
- The Homeowner Mortgage Support Scheme enables eligible borrowers to reduce their monthly mortgage interest payments to affordable levels for up to two years, helping them get back on track with their finances if they suffer a temporary loss of income.
Significant funds invested to strengthen the provision of debt advice, including:
- £130 million in England and Wales between 2006 and 2011 for free face-to-face debt advice
- an additional £10 million last November to support longer opening hours at over 330 Citizens Advice Bureaux
- £5.85 million for the National Debtline to increase frontline staff levels by 50
This is in addition to the investment in legal advice available through the Legal Services Commission to help those in need in the current economic climate.
The new self-help debt advice toolkit being developed by the Money Advice Trust and funded by BIS will enable those who can to negotiate debt repayments with creditors themselves with more targeted advice agency support. This will allow debt advice agencies to prioritise their resources better and advice more clients who need in depth help.
Jan/100
Advantages of debt management plans
Advantages of debt management plans
- Allows you to bring income and expenditure back into line without taking on more borrowing;
- You can follow this option by yourself or with the help of a no fee charging debt advice agency.
Disadvantages of debt management plans
- There is no guarantee that your creditors will accept the reduced payments and/or freeze future interest payments;
- The time taken to repay your debt will increase. The time will further increase if you pay your debts through a fee-charging debt management company;
- Your credit reference file will show details of the Debt Management Plan. This will affect your ability to get credit in the future.
Debt management plans can be a good option if:
- Your financial problems are caused by a temporary reduction in income and the situation will improve in the near future.
Debt management plans can be unhelpful if:
- Your ability to pay your debts will not improve within 12 months.
Debt management plans can be disastrous if:
- The fees taken by commercial debt management companies and the refusal of banks and credit card companies to freeze interest means that your debt steadily increases.
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