Debt Management Plans

If you are in financial difficulties and struggling with non-priority debts such as personal loans and credit cards then you might be considering a debt management plan. 

A debt management plan is an agreement where a consumer in financial difficulties agrees with their creditors to repay not all, but part of their debts that they are having difficulties with.

A debt management plan should not be seen a quick-fix solution and is only suitable for a limited number of consumers.  For instance, it is only relevant for consumers who have a regular income and are able to fully pay priority creditors and bills such as council tax, mortgage or rent payments and still have money left over each month, but not enough to pay non-priority debts such as personal loans or credit cards in full.  A debt management plan is for consumers who do not want to take out further loans to consolidate their debts, but want to clear their debts.

In the UK there are dozens of Debt Management Companies (DMCs) offering to help consumers with their non-priority debts.   The DMC will negotiate with the consumer’s creditors on their behalf and attempt to agree frozen interest and reduced payments on those non-priority debts.  These agreed reduced payments form the basis of the debt management plan.  The consumer then makes one payment to the DMC each month and the DMC will distribute it to the creditors.  The consumer could then be debt free in 60 months’ time.

Most DMCs will charge a fee for this service, while there are some organisations that will do it for free.  One such organisation who offers free debt advice and debt management plans is National Debtline.

The advantages of using a DMC are:

• You only have to worry about making one payment each month – direct to the DMC.
• The DMC will then divide the payment fairly between all the creditors – you will not need to contact your creditors

The disadvantages of using a DMC are:

• The majority of DMCs charge an upfront fee which can be quite high.  This means you could be left with less money to pay off your debts
• The majority of DMCs also charge an administration fee each month.  Again, this means you could be left with less money to pay off your debts
• Some DMCs will take all of the first month’s payment as a fee.  This will automatically put your account into arrears by a month or more.  These arrears will then be recorded on your credit file
• As mentioned above, DMCs only offer help with non-priority debts such as personal loans and credit cards – they do not help with priority debts such as mortgage or rent payments, which will remain your responsibility

If you decide to appoint a DMC you should take the time to carefully read the debt management plan agreement before signing anything. In particular, check:

• If you are able to cancel the agreement at any time if you are disatisfied with the service
• What the cost and fees would be if you did cancel the agreement
• Whether you will get your fee returned should you cancel the agreement
• Which creditors the DMC will deal with and which creditors you will still need to deal with
• Finally, if you remain unsure whether a DMC is right for you then seek free, impartial advice from either the Citizens Advice Bureau or National Debtline.