If you are having financial trouble and are having difficulty repaying your creditors, one of the debt solutions you are likely to become aware of is a Debt Management Plan. This is known as one of the big three debt solutions in the UK in terms of the number of people who use them. The other two are Individual Voluntary Arrangements (IVAs) and Bankruptcy. It is estimated that there are up to one million consumers in the UK currently in debt management plans with their creditors.
Debt Management Plans can be organised by yourself if you can reach an agreement with your creditors to repay your debts on a pro rata basis i.e. the amount you repay to any individual creditor is in the same ratio as that debt is to the total debts. If you owe 3,000 to one of your creditors and you owe 30,000 in total to all of your creditors, then 10% of what you can afford to pay each month goes to your first creditor.
Most Debt Management Plans are not self administered but are managed on your behalf by Debt Management companies. These Debt Management companies arrange the Plan and negotiate with creditors on behalf of the debtor. The debtor pays money each month to the Debt Management Company who then divide it up between each of the creditors having organised an agreed fee. These Debt Management companies in the UK have hundreds and sometimes thousands of clients on their books.
So how come Debt Management companies sometimes get bad press? One reason for this could be that the Debt Management process is somewhat under regulated in that it doesn’t fall under the aegis of the Insolvency Act. For this reason some service providers have been accused of making misleading or false claims in their advertising, providing poor debt advice and accused of overcharging their clients. This has resulted in the OFT recently telling a number of such companies to take immediate action to clean up their act and start acting more professionally.
The main draw of a Debt Management plan is that it is an informal arrangement between you and your creditors. This means the name of the debtor in a Debt Management plan will not appear on the Insolvency Register. Theoretically the credit rating of a debtor who enters a Debt Management Plan should not be affected by entering it but in reality, it probably was already negatively affected before the Plan commenced.
The main effect of a Debt Management Plan is the length of time repayments will go on as it is considerably extended. While some creditors may stop charging interest and penalties it may take a long time, in some cases up to ten years, before the debts are fully repaid.
A big benefit of Debt Management is that you do not have to be insolvent to enter into one, unlike an IVA or Bankruptcy.
Creditors in the most part are in favour of Debt Management Plans since they aim to repay the debts in full. Debtors are advised to be wary when choosing a Debt Management company to act on their behalf. There are many reputable companies whose standards of advertising are professional, whose advice is thorough, and of a high quality and whose fees are reasonable, competitive and explained to clients fairly, but there are also bad unethical companies, so make sure and do your research and choose carefully.