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Debt management and Debt management plan
When you are in debt, it can often feel as if there is no way out. This could not be further from the truth. We take a look at what debt management is and the next steps you could take if you are in debt.
What is debt management?
Debt management is a way of managing your debts by either settling or resolving them. Normally, this is done through a debt management plan.
A debt management plan is a way of paying back non-priority debts, such as loans or credit cards, in one monthly payment. This amount is then paid to your creditors, normally by a debt management plan provider. Sometimes, it is called a debt management program.
Debt management plans are not legally binding. This means that you can cancel them at any time.
How does debt management work?
If you are facing debt problems, making payments to your creditors can be stressful.
A debt management plan, also known as a debt management scheme, means that you only need to make one affordable payment per month, instead of lots of payments to different creditors. Debt management companies can arrange this with your creditors directly.
Debt management help is available for free from organisations such as StepChange. You can also get debt advice from charities like StepChange, too.
Some providers charge a fee for their service.
What are your options for paying off your debt?
If you are struggling to afford to repay what you owe, debt management plans aren’t the only way to deal with debts.
Some people opt to consolidate all of their debts into one loan, which they then pay off in monthly payments. This is known as a debt consolidation loan.
Debt consolidation loans can either be secured or unsecured. A secured loan is where the money you’ve borrowed is secured against an asset, such as your home. If you do not make the repayments when they are due, you could lose this asset.
Unsecured loans are not secured against an asset. Sometimes these are called unsecured debts.
Depending on your situation, moving your debts to a cheaper credit card may be possible.
Individual Voluntary Arrangements are another way to pay of all or some of your debts. Here, you pay an insolvency practitioner, who then pays your creditors.
Dealing with debts does not have a ‘ one-size-fits-all ’ solution. These are just some of the options you may have. It is important to seek debt advice before deciding which route may be right for you.
Which debts you can resolve with a debt management plan
Debt management plans can only be used for non-priority debts, such as:
It is not possible to repay priority debts with a debt management plan. Priority debts include your council tax, mortgage and any court fines. These are known as priority debts because there may be more serious consequences if you don’t repay them.
Debt management plans (DMP): pros and cons
Many people view a debt plan as the debt solution but they are not right for everyone.
Debt management plans can help reduce the stress involved in owing money to lots of different creditors, as someone else will deal with your creditors for you. It can also help you to budget, as you will have just one monthly payment.
However, as you will normally be making reduced payments, it may take you longer to repay what you owe.
In addition, interest and charges on your debt may still be applied. In other words, your creditors may not freeze interest, so your debts may not go down by as much as you might expect. This means you could end up paying more overall, as you may be paying your debt back more slowly.
Will debt settlement hurt your credit record?
A debt management plan could be visible on your credit report. It will normally lower your credit rating. This means you may find it harder to get credit in the future.
How long debt management stays on a credit report? How long does it take to improve your credit score after debt settlement?
Although the debt management plan itself isn’t put on your credit report, the fact that you’re making reduced payments (less than the amount that was agreed when the debt was taken out) could be. Your creditors may record a default on your credit report.
This will stay on your report for 6 years.
What is the best debt management program?
Some debt management companies charge for their services. However, there are several debt management firms/providers, who provide this service for free.
You can contact your local Citizens Advice Bureau for information about debt management providers. Debt charity National Debtline could also refer you to a provider. Alternatively, you could conduct your own research online.
All debt management plan providers should be authorised by the Financial Conduct Authority (FCA).
Things to consider before entering a debt settlement program
A debt management plan could be one way to help you get back on track financially.
If you would prefer for someone else to deal with your creditors and to make lower monthly repayments, a debt management plan may be right for you. However, if you want to pay off your debts at a faster rate, there may be better alternatives.
What’s more, if you’re struggling to pay off your priority debts, a debt management plan may not work for you.
It’s also important to consider how a debt management plan may affect your future. As it could impact your credit score, you may find it more difficult to borrow money further down the line.
Repaying your debt has to be done in a way that suits your situation.
Debt management plans will not work for everyone. If you’re unsure about what may be the best option for you, you can seek free debt advice at a number of debt charities.
Most importantly, remember that there is always a solution for debt, no matter how bad it gets.