If you’re finding your debts difficult to manage, and you feel as though you’ve got nowhere to turn, a debt management plan may be right for you.
But the question is, what is a debt management plan… and how does one work?
The following information discusses a debt management plan as it would be if it was set up through a professional debt management company.
A debt management plan is an informal agreement between you and your unsecured creditors in which you’ll repay your debts under different terms.
It involves your debt management company speaking to your creditors, asking them to accept lower monthly payments over a longer period of time – and possibly a reduction/freeze in interest and charges on your debts.
If they agree to this, you’ll be able to repay the money you owe in a manner you can realistically afford. What’s more, you’ll be making just one payment per month – to your debt management company. Money will then be shared out amongst your creditors according to how much you owe each of them.
If all works out as planned, you’ll continue making these payments until you have repaid your debts (or until your situation improves enough for you to revert to your original payments).
Pros of Debt Management
Let’s take a look at some of the advantages a debt management plan can offer:
- You’ll only have one payment to make each month instead of several. This payment will be based on the amount of money you have left after you’ve covered your essential costs (mortgage/rent payments, for example, travel expenses and utility bills).
- Debt management is an informal agreement, and it can be quite flexible. This means that if your situation changes later on (for better or for worse), your debt management company may be able to speak to your creditors and renegotiate your debt repayments accordingly.
Cons of Debt Management
Like any other debt solution, a debt management plan has its disadvantages. Let’s take a look at two of these now:
- Arranging to repay your debt over a longer time frame will mean you’ll stay in debt for longer and may end up repaying more in total. It’s also important to bear in mind that by altering the way you’re repaying your debts, you’ll be defaulting on an original agreement. This will be recorded on your credit rating for six years (potentially making it harder and/or more expensive to borrow money for this time).
- Your creditors aren’t obliged to agree to any changes to the original repayment agreements. However, if they can clearly see that you can’t afford your payments as they stand and this is the best way for you to repay your debts, they may well agree.