Debt Management Guide
Debt management plans are just one of the ways people in debt could tackle their financial problems.
Designed for people who can’t afford their monthly debt repayments, they could allow them to reduce their monthly outgoings and make just one payment towards their debts every month – based on what they can afford now, rather than what they could afford when they took on their debts in the first place.
How does debt management work?
The first step involves the person in debt contacting a debt management company to discuss whether a debt management plan would be right for them. To determine whether one would be suitable, the individual will be asked questions: about their income, their expenditure, how much money they owe, who they owe money to, and so on.
Assuming that entering a debt management plan looks like the best way for that person to tackle their debts, the debt management company will work out an affordable plan for repayments to their unsecured creditors (note that different debt management organisations may work in different ways).
The debt management company will then speak to the individual’s creditors – asking them to agree to lower monthly repayments based around what the borrower can realistically afford.
Creditors aren’t obliged to accept any changes to the original repayment agreement, but they are likely to consider them if they believe they are more likely to get their money back if they allow the individual to repay their debt more slowly – at a rate that’s affordable to them.
If the negotiations work out, the borrower will start making one payment each month to the debt management company. This money will subsequently be divided between the person’s creditors according to how much they owe each of them (this is known as a pro rata payment). Please note that the debt management organisation may charge a fee for their services.
If the individual’s circumstances subsequently change in a way that affects their ability to make their monthly repayments, the debt management company will contact their creditors and request changes to the plan, making sure the payments remain affordable.
If the borrower’s financial situation improves while they’re on a debt management plan, and this means they can afford to make more than the required monthly payment, the debt management company may negotiate higher monthly repayments to the person’s creditors – which means they will repay their debt more quickly.
Debt management FAQs
As with any debt solution, there are various things the borrower should take into account if they’re thinking about entering a debt management plan:
- What effect will debt management have on my credit rating?
By entering a debt management plan, an individual will be defaulting on their original repayment agreement – which will show up on their credit rating for six years, potentially making further credit harder and/or more expensive to obtain during that time.
- If I repay my debt over a longer period of time, will I pay more interest?
By agreeing to repay their debt over a longer period of time, individuals may increase the overall interest they’re paying, as the debt would have longer to accrue interest. However, this may not be the case, as creditors may agree to freeze/reduce interest.
- Is debt management a legally binding debt solution?
Debt management is an informal financial agreement, and is not legally binding. Creditors are not obliged to accept any changes to the original repayment plan.
- I’m struggling to meet my repayments – would debt management be suitable for me?
Debt management is only suitable for people who cannot afford their monthly repayments as they had originally agreed, so people who are simply finding it difficult to make their repayments would need to look into different ways of tackling their debts.
Useful UK debt management websites
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