How does a Debt Management Plan work?
Debt Management Plans can be very simple if you understand how they work.
The Debt Management Company you have appointed to represent you will ask you how much money you can pay back your creditors every month after your living expenses have been paid.
This is the most key part of any Debt Management Plan; too little and your creditors may refuse to accept you plan. Try and pay too much and you could leave yourself short of money.
To pitch your offer to your creditors at the right level, you need to know exactly how much money you have to pay back your creditors. This involves doing something you may never have had to do before; make a budget.
How do I work out my budget?
Your Debt Management Company will give you a budget sheet where you can list all of your monthly expenses, such as mortgage, utilities bills, council tax, childcare, food and travel costs but excluding debt payments. It pays to be honest about how much you really need to live on; many people give themselves a really tight budget almost as a punishment. The problem with this approach is that in the beginning when you are full of optimism you may be able to live a bare bones budget, but after a year or two it will become much harder to do and the restriction on you could drive you back to borrowing credit again.
Once you have worked out your budget, you will know how much surplus you have left to offer your creditors. Ideally, you should have a minimum of £100; any less and your creditors may refuse to accept your Debt Management Plan.
Will my Debt Management Company deal with my creditors?
At this point your Debt Management Company will approach your creditors explaining that you cannot pay the amount you agreed to in your original credit agreement with them and ask them to agree a new one for a smaller monthly payment over a longer time period. At the same time, they negotiate with them to freeze any interest and charges on the debt – they may not agree to do so but many know that at this stage it makes sense to do so. This stage of the process could take a few weeks, even a couple of months, as your Debt Management Company negotiates back and forth with your creditors.
Is there any guarantee?
There is no guarantee your creditors will accept your Debt Management Plan, but if the terms are fair and reasonable they may be willing to accept it. Most lenders want to see you pay back what you owe them and are generally willing to try and meet you some of the way. It often serves no purpose to pursue you for money you do not have because there is the risk you could declare bankruptcy and they will get nothing.
Will my creditors agree to my plan?
If your creditors agree to your Debt Management Plan, your Debt Management Company will draw up a formal agreement stipulating what your monthly payment will be to each, and their fees for taking care of your account. They may also request you set up a basic bank account with no overdraft facility so you can make a fresh start and more easily live within your means.
Then every month you make one payment to your Debt Management Company, who will in turn distributes it to fairly between your creditors as agreed with them, and this continues until you have paid back all of what you owe.
For more information on whether a Debt Management Plan is right for you call now and speak to one of our advisers on 0800 043 2027 or see if you qualify here.