Is a debt management plan right for me?

If you have more than one unsecured loan that you are finding difficult to repay on time, then a debt management plan might be well suited to you.

The following page will explain what a debt management is, how it works and which factors you should consider before making the final decision over acquiring one.

What is a debt management plan and how does it work?

A debt management plan is an informal agreement between yourself and your creditors to repay your non-priority debts on a reduced monthly basis. Your non-priority debts include liabilities you have obtained through your usage of financial products such as a credit card, personal loan or overdraft.

In order to set up a debt management plan, you will have to assess your monthly priority expenses, such as your housing, utility, council tax and income tax payments, and subtract the total of these away from your monthly income. After doing this, you will have an accurate idea of the amount of money you can afford to contribute towards the repayment of your debt each month, and can devise a proposal with all the supporting financial documents to submit to your creditors. Your proposal will include an offer to make a single, fixed monthly payment each month, which will then be distributed amongst your creditors.

It is important to remember that a debt management plan is not a legally binding solution, and as such your creditors are under no obligation to accept your proposal or uphold its terms. However, if you are defaulting on your loans already, then it might be more beneficial for them to accept your offer to set up a debt management plan, rather than receive no payment at all.

Debt management plans can either be formulated and pitched to your creditors yourself or done by an external debt management plan firm who will take over interaction with your creditors on your behalf. If you decide to use a debt management plan provider, then you will need to pay them a monthly fee, which will usually be taken out of your creditor repayments.

What are priority debts?

Your priority debts are your liabilities which have the most severe repercussions for missing payments. These types of debt cannot be included in a debt management plan and you will need to ensure that you have enough money each month to meet the payments for these before pursuing the acquisition of a debt management plan arrangement.

Your priority debts are:

  • Outstanding payments on your mortgage or rent
  • Council tax bills
  • TV license payments
  • Court decreed maintenance payments to a former spouse or children
  • Utility bills
  • Court fines from the magistrates
  • Income tax or VAT payments owed to the HMRC

Your non-priority debts are unsecured liabilities you have accrued from financial products such as your overdraft, credit card, personal loan or store card. Non-priority debts can be included in your debt management plan, and you will need to determine how much disposable income you have left each month after making your priority debt repayments in order to ascertain the amount to offer your creditors as a monthly repayment.

Is a debt management plan the right solution for me?

A debt management plan might be ideally suited to your situation if the below is relevant to your situation:

  • You are not confident dealing with your creditors alone or believe that they are exploiting your situation for their gain
  • You are finding it difficult to manage making numerous payments to a number different creditor’s each month, and would like to simplify the repayment of your debts into a single, monthly sum.
  • You have enough money each month to pay your priority debts and living expenses, but cannot simultaneously afford to pay your non-priority debts as well.
  • You believe your financial difficulties are short term, and would like a debt solution that is flexible and will reduce the immediate financial strain on your.

However, there are also a number of disadvantages to using a debt management plan which it is important you are aware of:

  • Your creditors are under no obligation to accept your debt management proposal and you could find that using this debt solution is untenable.
  • It will usually take you more time to repay your debt as you will be making reduced repayment sums each month.
  • Using a debt management plan will have a negative impact on your credit rating, which could make it difficult for you to acquire new finance in the immediate future.
  • If you use a debt management firm, then they might charge high fees which will mean you take longer to pay your debt back if they debt it straight from your monthly payments.
  • Your creditors are not legally bound by the terms of your debt management plan and could choose to terminate your agreement at any point.
  • There is no guarantee that your creditors will freeze the late and interest charges to your account, which might mean that your debt continues to rise despite paying smaller sums each month.

If you’re unsure about whether this sounds like it’s right for you, you might want to think about other options for dealing with your debts.

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