Who needs debt management?

A debt management plan is a debt solution that can help people deal with debts that have become unmanageable - because their income has dropped, for example, or because their debts have grown too big. It could be suitable for someone who can`t keep up with their monthly payments, but who is confident they can repay the debt (if they`re allowed to do so over a longer time than originally agreed).

How does debt management work?

Debt management involves negotiating with your lenders. Once you`ve figured out how much you can afford to pay per month, contact your lenders, explain that you can no longer afford the payments you originally agreed to, and ask them if they`ll agree to accept lower payments. If they can see that this is the most realistic way of you repaying what you owe them, there`s a good chance they`ll agree.

To do that, of course, you`ll need to figure out

1. Your income - how much you earn / receive per month, and
2. Your essential expenditure - how much you need to spend (mortgage/rent, utility bills, food, essential transport & clothing, etc.) per month.

You`ll then need to:

• subtract (b) from (a) to get your `disposable income` (the amount that`s available to pay your unsecured lenders), then
• divide this disposable income up among your lenders so you`re offering each lender a fair amount that`s based on how much you owe them (a `pro rata` payment), then
• talk to your lenders and see if they`ll accept those pro rata payments.

Can I set up my own debt management plan?

Of course. In fact, many borrowers choose to tackle their debt problems on their own - perhaps because:

• They`re confident they can deal with their debts and their lenders without any help.
• They don`t want a third party involved.
• They don`t want to pay the fee which many debt management organisations will charge.

However, a lot of people turn to a debt management company for help. This could be for various reasons - for example:

• Because they don`t want to negotiate with their lenders on their own.
• Because they`d like to have some professional help with all the calculations involved.
• Because they`ve lost track of their debts and want help making sense of their financial situation.
• Because they know their financial situation could change again and they don`t want to have to go back to their lenders and renegotiate every time this happens.

Are there any drawbacks to debt management?

Whether you end up running your own debt management plan or asking an organisation to do it for you, please note that repaying any debt more slowly than originally agreed can damage your credit rating for six years (the amount of time it`ll stay on your credit report). Potential lenders will be able to see that you`ve not repaid your debts as you agreed, and this may mean they charge you a higher interest rate when they lend you money (or they may even refuse to lend to you at all).

Then again, debt management is only an option for people who can`t keep up with their payments, which means they`ll be very likely to damage their credit rating whether or not they join a debt management plan.

Finally, repaying a debt more slowly can add to the overall cost as it`ll be accruing interest for longer - although your lenders may agree to freeze / reduce interest charges while your debt management plan is in progress.]]> /debt-management-features/3121/can-I-set-up-my-own-debt-management-plan.htm Mon, 22 Mar 2010 16:38:8 GMT
There are various factors that could affect this, such as...

How much debt are you carrying?

The biggest single factor here is the amount owed - not as an actual amount, but in relation to the borrower`s disposable income*. Clearly, someone with a well-paid job and no big commitments (mortgage/rent, children, etc.) could probably clear a £1,000 debt faster than someone who works part-time could clear a £500 debt.

What kind of debt are you carrying?

The size of a debt isn`t the only issue - there`s also the question of what kind of debt it is.

A credit card debt, for example, is totally different to a personal loan. A loan is a one-off sum of money which is gradually repaid over a set period of time, while a credit card gives the borrower access to a certain amount of credit which they don`t have to access or pay back in any particular way (although they will be required to pay at least a minimum amount every month).

When it comes to repayments, the credit card debt might sound more appealing since it gives the borrower the opportunity to pay just the minimum every month if they want to. However, this isn`t necessarily a good thing - unless they`re disciplined enough to make more than the minimum payment, even a relatively small credit card debt can take many years to clear (which means it`ll have a long time to accrue interest).

Having said that, someone who`s confident they`ll repay as much as they can every month could choose to borrow on a credit card (rather than a loan) for that very reason - so they can clear their debt as quickly as possible by figuring out the maximum they can afford to pay on a monthly basis.

Could you clear your debt faster than you are doing?

And of course, the way you tackle your debt is another major factor: someone who`s determined to put as much as they can afford towards their debts every month is obviously likely to repay what they owe a lot faster than someone who tries not to think about their debts.

Depending on what you owe, what you earn and what you spend (among other things), there are different ways of clearing your debts faster.

A good way to clear your debt faster is to overpay it (to pay more than you`re obliged to on a monthly basis). Credit card debt isn`t the only kind of debt that allows this - many mortgages, for example, allow the mortgage holder to overpay (in fact, many homeowners have taken advantage of today`s low interest rates to clear their mortgage debt more rapidly than they expected to when they bought their home).

Some people may choose to cut back on luxuries and non-essential spending so they can focus on overpaying their debt until it has been paid off entirely.

If you`re not sure how to clear your debt, or if you`d just like some advice, it`s a good idea to talk to a professional debt adviser, who can assess your situation and recommend an appropriate way out of debt.

The sooner the better

But however you choose to tackle your debt, the sooner you start really focusing on it, the better. There are various reasons for this - such as...

• First of all, the sooner you start really tackling your debts, the sooner you`ll finish.
• Second, the sooner you`re out of debt, the sooner you`ll stop paying interest - which means you`ll pay less in total.
• Third, carrying debt can be dangerous. No-one`s financial situation is set in stone. If you lost your job tomorrow, would you be able to keep on making your debt payments - or would your debts rapidly get out of control?

* Disposable income equals total income minus total essential expenditure - it`s the amount of money an individual has left after they`ve taken all their essential costs into account. Disposable income is the money which is available for putting towards unsecured debts, saving, and spending on non-essential goods and services.

Like any debt solution, however, debt management can`t help everyone. You should always speak with a professional debt adviser before deciding on a debt solution.

Here`s an introduction to debt management to help you get started.

How debt management works

A debt management plan is an informal arrangement with your lenders, in which you`ll agree to make lower monthly payments towards your debts, which you`ll repay over a longer period of time than originally agreed.

Lenders may accept this if they can see that it is the most realistic way for them to get back the money they are owed. So if you simply can`t afford your existing debt repayments, but feel you would be able to repay your debts in full over a longer period of time, debt management may be the right debt solution for you.

It`s possible for you to arrange a debt management plan on your own. However, because of the time and effort involved, you may prefer to let a professional debt management company do the hard work on your behalf.

Will I still get letters or calls from my lenders?

Different lenders work in different ways - and different debt management companies offer different levels of service. If, for example, you receive letters from your lenders while you`re on a debt management plan from Gregory Pennington, you can simply forward them to us in one of the pre-paid envelopes we provide, and we`ll deal with them. If they phone you, you can ask them to call us instead.

The Office of Fair Trading (OFT) has issued a report entitled `Debt collection guidance - Final guidance on unfair business practices`, which states that the following (among others) are examples of unfair practice:

• refusing to deal with appointed or authorised third parties, such as Citizens Advice Bureaux, independent advice centres or money advisers
• contacting debtors directly and bypassing their appointed representatives
• operating a policy, without reason, of refusing to negotiate with debt management companies.

A few points about debt management

First of all, debt management is only an option if you can`t keep up with payments to your debts. If you can keep on making the payments in full, lenders will expect you to.

Second, you can damage your credit rating (potentially increasing the difficulty and/or cost of obtaining further credit for the six years it stays on there) if you fail to repay any debt in the way you originally agreed. This is true whether or not you actually join a debt management plan.

And third, repaying any debt more slowly can end up costing more, as it`ll be accruing interest for longer. Of course, if lenders agree to freeze interest, this won`t be an issue.

The IVA approval process

Before an IVA can go ahead, you`ll need to work with an Insolvency Practitioner (IP) to draw up the initial IVA proposal. This sets out the proposed terms of your IVA, such as how much you can afford to pay to each of your creditors, and over what period of time.

The IVA proposal will be sent to each of your lenders, who will be given at least 14 days to consider the terms and `vote` for or against the IVA. At the end of the given period, the `creditors meeting` will take place - a period of time in which you and your IP must make yourselves available to consider any queries your lenders may have regarding the terms, and any changes they may wish to request.

For the IVA to go ahead, 75% of voting lenders (by debt value) must approve the terms. If it`s approved by enough of your lenders, the IVA will become legally binding on everyone - including any lenders who didn`t vote, or voted against it.

What happens after my IVA has been approved?

If your IVA is approved, you will then begin making regular payments, in most cases every month for 5 years, to your IP. The IP will distribute the agreed amounts among your lenders as set out in the proposal.

As long as you fulfil your side of the agreement, your lenders will not be able to change their minds or take any legal action against you.

An IVA will usually last for 5 years (although this can vary). At the end of this period, providing your IVA is completed successfully, you will be legally debt-free.

What else should I consider?

An IVA is a serious financial commitment and will have a significant impact on your credit history, potentially making it difficult and/or expensive to obtain credit for 6 years from the day the IVA starts. It will also leave you with little or no disposable income, as you will be expected to contribute as much as you possibly can towards the IVA (after your essential costs have been covered).

You may also be required to give up a portion of any increases in your income (while the IVA is running) to put towards your debts. And if you`re a homeowner, you may be expected to release some of the equity in your home in the final year of the IVA.

• during which, any creditor named on the order cannot take any action to recover their money unless they have the court`s permission, and
• after which, the individual will be freed of the debts included in the order (unless their circumstances have significantly improved).

DROs don`t involve the courts, and are run by The Insolvency Service in partnership with debt advisers known as `approved intermediaries` - the people who actually help individuals apply to the Service for a DRO.

Would a Debt Relief Order be suitable for me?

As The Insolvency Service website (insolvency.gov.uk) states, a Debt Relief Order is suitable for people who don`t own their own home - but this isn`t the only condition.

People can only enter a DRO if they meet the following conditions:

• They must be unable to pay their debts.
• They must not owe more than £15,000.
• The total value of their assets must not exceed £300 - although they can own a car worth up to £1,000.
• Their disposable income (after tax, national insurance contributions and normal household expenses) must not exceed £50 per month.
• They must live in England or Wales - or have lived / carried out business in England Wales at some time in the last 3 years.
• They must not have been subject to another Debt Relief Order in the previous 6 years.
• They must not be involved in another formal insolvency procedure at the time they apply.

Would a Debt Relief Order write off all my debts?

Some debts cannot be included in a DRO - such as :

• Magistrates` court fines,
• Student loans, and
• Secured debts (debt secured against property)

Secured debts are unlikely to be an issue anyway, as owning property would probably mean you`re not eligible for a Debt Relief Order, as your assets would almost certainly be worth more than £300.

Does a Debt Relief Order come with any restrictions?

Yes - similar to the restrictions you would face if you were declared bankrupt. For example, you would not be able to obtain credit of £500 or more without declaring that you`re subject to a DRO.

We’ve almost grown used to bad news about the nation’s economy, but it seems the effects of the credit crunch, the mortgage crisis and dropping house prices are now affecting us as individuals. As a result, more and more people are worried about their finances. For anyone already struggling with debt problems, it’s a particularly worrying time – if they can only just manage their monthly debt repayments now, what will happen when their financial situation gets worse?

Time for debt advice?
Perhaps the only good news is that people are aware of the troubled times ahead. Anxious people are more likely to take steps to sort out their finances before it’s too late. They’re more likely to ask for help with their debts, whether that means taking advice from a debt expert or looking into professional debt solutions – a debt consolidation loan / mortgage, for example, or a debt management plan. For more serious debts (normally in the region of £15,000 or more), they might find that an IVA (Individual Voluntary Arrangement) is the best way out of debt.

Why so many different debt solutions?
Debt management, debt consolidation, IVAs, remortgages… to someone in debt, the sheer number of debt solutions available might be confusing, but they’re there for a good reason. Everyone’s situation is different, and the debt solution that’s right for one person may be totally inappropriate for another.

If you’re in debt, it’s essential to talk to a debt adviser before you sign up to any particular debt solution. Gregory Pennington, for example, has been providing free debt advice for 15 years and offers a wide range of different debt solutions to help people with different kinds of debt.

• secured credit for the last two quarters
• unsecured credit for the last four quarters

...and lenders expect the availability of both to decrease further in the next quarter.

2) Lenders have become understandably ‘risk averse’, since default rates on:

• secured credit have risen for the last four quarters
• unsecured credit were higher than expected in Q2

...and lenders expect defaults on both to rise further in the next quarter.

Lenders are facing their own problems and can’t always provide the debt help (in the form of credit) which people need. They can’t risk stretching their finances too far, so more and more people are being forced to manage their debts without debt consolidation loans, remortgages and credit cards. It isn’t easy, but if these tough times teach us to appreciate the importance of managing our debts, at least the credit crunch will have achieved something worthwhile!

*The Organisation for Economic Co-operation and Development publishes its Economic Outlook twice a year.