A Debt Management Plan is one of a number of ways of reducing the amount of money you owe to your creditors. It’s relatively easy to set up and it’s quite an informal way to address your debts in a simple yet structured way. The problem is that some Debt Management Plans can last a very long time and because they are an informal solution, creditors can change their minds as to whether they will continue to co-operate with you and particularly if they will agree to suspend interest and penalties indefinitely, that is if they agreed to suspend them in the first place.
Determining the length of time of a Debt Management Plan depends on several factors. One of the most important factors you must consider before entering a Debt Management Plan is how much you can afford to pay into the plan each month after you take into account your household living costs. Your Debt Management Plan will last until all of your debts have been fully repaid or settled, or until you opt out of it to continue paying your debts in your own way. The more you can pay into your plan each month, then the shorter the plan is likely to last.
Your creditors are under no obligation to write off any part of your debts nor do they have to suspend interest and penalties on your debts. In practice creditors will often agree to suspend interest and charges for a period of time if the debt management company can negotiate it.
It is therefore not simply a matter of dividing the total amount of your debts by the monthly payment to arrive at the number of months that your Debt Management Plan will last. You need to add onto that the number of months that additional interest and penalties will add to the term of your Plan. In addition, if you engage the services of a debt management company, they will charge a monthly management fee while they manage your case and those fees will come out of the monthly payment as well, therefore extending your payments somewhat.
The additional interest and penalties and the fees of your debt management company will effectively increase the duration of your Debt Management Plan until all of your debts have been totally repaid. This means that the total amount you will have to pay can be considerably more than the total amount of debts that you started out with. Of course, if you or your debt management company can successfully negotiate to have interest and penalties suspended for the full duration of your Debt Management Plan, that duration can be shortened.
Reducing the term of a Debt Managment Plan
There are some actions you can take to reduce the term however. One way is to increase the amount you pay into your Plan each month but that depends on your income increasing or your costs of living decreasing or both. You should together with your debt management company review your finances regularly to see if you can indeed increase your monthly payments.
Offer a lump sum payment
Another way to reduce the term is to make an offer of a lump sum payment to your creditors in what is sometimes described as a ‘full and final’ settlement offer. If for example you were in a position to offer a lump sum which would repay half or more of your debts immediately, creditors might agree to take that money right away, writing off the remaining balance of your debts, rather than wait for perhaps many years to get the full amount from you through your monthly payments. Finding such a lump sum might not be easy. One source of such money might be family or friends or perhaps you might have assets such as a property which you could sell to raise the amount to be offered. From the point of view of your creditors, they would make savings in reduced administration costs, in not having to process small monthly repayments for years into the future.
Alternatives to Debt Management
The lengthy duration of a Debt Management Plan is one of the main drawbacks which you can face in such an informal solution. This is one of the reasons why an alternative solution such as an individual voluntary arrangement (IVA) or even bankruptcy might be a more attractive or suitable solution for you if you are having financial difficulties. In some cases Debt Management might start out as the best solution but as financial circumstances change an IVA or bankruptcy might be a better solution if you become insolvent. Indeed many people do enter Debt Management for perhaps six to twelve months and then offer their creditors proposals for an IVA or perhaps petition for their own bankruptcy. That is why it is important to obtain advice from a competent insolvency professional, before making a decision so that all options can be explained and considered before choosing the course of action that is most appropriate for your particular circumstances.
Creditors of course would prefer that the terms of their original contracts with you would be honoured and that debts would be repaid in full and on time. However, they do understand that in the real world it is unavoidable sometimes for finances to fall by the wayside and for you to be at risk of defaulting on payments. In such a scenario, creditors want to maximise the amount of the borrowed funds that they can get back and recover the funds in as short a time as possible. A Debt Management Plan is a plan to repay all of the debt but at a slower rate than originally agreed and over a longer period of time than originally contracted. Since the Plan promises and projects repayment of the debt in its entirety, from the point of view of the creditor, it is a distinctly better solution than bankruptcy, since in bankruptcy only a small amount of debt is usually repaid. Creditors also generally prefer Debt Management to an IVA, where they usually recover less than half of the monies owed and sometimes much less.
One reason why you might prefer a Debt Management Plan over other solutions is that you might not want to sell your home, for example. By entering Debt Management you might be able to manage your finances in a more orderly way until you can sell or re-mortgage your property at a time that suits or when the market is more favourable or when re-mortgage terms are more reasonable. Of course, you do have to be insolvent to enter into an IVA or to petition for bankruptcy but you can enter a Debt Management Plan without being insolvent.
Written by Paddy Byrne
02 / 04 / 2013