Can I set up my own debt management plan?

22 March 2010

Lenders live in the real world. They know that people`s circumstances can change, and that anyone`s financial fortunes can always take a turn for the better - or for the worse.

If you`re in that situation and you simply can`t keep up with your debt repayments anymore, you might be surprised at how much `leeway` your lenders are prepared to give you if you just talk to them (or ask a debt management company to talk to them on your behalf).

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.

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Gregory Pennington is a member of DEMSA whose code of conduct is approved by the Office of Fair Trading.