Debt management - things you should know
If you`re struggling with unmanageable debts, then a debt management plan could help.
Debt management plans have helped many people - but, as with any debt solution, they do have their downsides. Here`s a look at how debt management works, and some things you may wish to consider before entering into a debt management plan.
What is debt management?
On a debt management plan, you will make lower monthly payments towards your debts, based on how much you can afford once your essential commitments have been accounted for.
Before you start, the terms of your debt management plan must be agreed with your lenders. You can carry out these negotiations by yourself, but as this can be quite time-consuming, you may prefer to let a professional debt management company negotiate with your lenders on your behalf.
If you choose to do this, your debt management company will be your point of contact with your lenders for the duration of the debt management plan, and will be able to answer any queries you may have along the way.
What should I know about my debt management plan?
A debt management plan is an informal arrangement - it is not legally binding. As such, your lenders are in no way obliged to accept the proposed terms of your debt management plan. They may accept changes to the way you`re repaying your debts today if they believe that this is the best way for you to repay your debts at an affordable rate - and in general, if they do agree to new terms, it`ll be for a pre-agreed period (most often 6 or 12 months), as long as you stick to your side of the arrangement
A debt management plan could cost you more in the long run. As you are spreading your repayments over a longer period of time than originally agreed, you will also be paying interest for longer. Unless your lenders have agreed a freeze or reduction on your interest, it is likely that you will pay more overall.
However, for many people, this may be less important than the reduced monthly outgoings, which should make a significant difference to their financial situation.
When is debt management not appropriate?
A debt management plan is designed to help people who can no longer afford to repay their debts under the existing terms. You will not be able to enter into a debt management plan unless you can demonstrate that this is the case with you, as your lenders will only agree to the terms if they can see it is the best way for them to get back the money they are owed.
Not only that, but the effect a debt management plan will have on your credit history is unlikely to be worthwhile unless you are having significant trouble repaying your debts. Since a debt management plan involves making alternative repayment arrangements, your credit history will show a `default` on your debt repayments, and this will be visible to creditors for six years (the standard length of time that entries are recorded).
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