If you have more than a handful of creditors and you owe more than, say, £5,000 and less than £15,000 and you have discounted an informal, personal approach to creditors, it is then worth considering whether a more formal payment plan through a debt management organisation is a suitable option. There is no hard and fast rule about the level of debt which may be suitable for debt management and a debt range of £5,000 to £15,000 is merely indicative. Everyone’s situation is different and needs to be examined individually.
Debt management-the process
If you approach a debt management company with a view to proposing a payment plan with your creditors, they will examine your income and expenditure and determine an appropriate amount to offer your creditors from your monthly surplus income. They will write to your creditors on your behalf and seek agreement to your offer. If your offer is accepted, you will make your monthly payment to the debt management firm and they will make payments to your creditors on your behalf.
Some debt management firms charge fees and some don’t. It is worth looking at the merits of each type of firm as the choice you make is an important one. Choice shouldn’t come down only to fees though and you should consider the quality of service and advice given.
Fee-charging debt management companies
If you set up your payment plan offer through a fee-charging debt management company, a fee deduction will be made from your monthly payment and the balance paid to your creditors. You must bear in mind that under a debt management plan your creditors want to be paid back in full. If you instruct a fee-charging debt management company, it will take longer for you to repay your debts because of the fee deduction made from your monthly payments.
Non fee-charging debt management firms
If you choose to make your offer to creditors through a non fee-charging organisation then the whole of your monthly payment will go towards repayment of your debts and you will probably repay your debts quicker.
Also, be aware that some (though not all) of the non fee-charging debt management organisations are funded by a number of the large creditors, such as banks and credit card companies and it is often argued that dealing with such a creditor-funded firm enhances your chances of obtaining agreement to your proposals. To counter this though, it may also be argued that impartiality and objectivity are compromised and that it is in the creditors’ interests to steer you into a debt management plan that may not actually be in your best interests.
Advantages of debt management
- You benefit from making reduced monthly payments
- Whilst the plan is in place and you are abiding by its terms, you need not worry about creditors taking any action, however please read disadvantages below.
- You may benefit from creditors agreeing to freeze interest charges so that each payment made makes a full capital reduction of the balance owing.
Disadvantages of debt management
- It is rarely understood that debt management is not in any way legally binding in the way an IVA is.
- Your creditors may not freeze interest charges.
- As your monthly payment is a reduced amount, you will be paying off your debts over a longer period.
- The more creditors in number you have the more problematical it is to obtain an agreement of all your creditors. As with informal personal approaches to creditors, it is essential that the agreement of ALL creditors is obtained otherwise you do not have the complete solution you require. If one or more creditors do not agree with your payment plan offer they are not bound by it and may seek payment from you outside of the plan. In most cases, that will be problematical as most or all of your surplus income will be going towards your creditors within the debt repayment plan.
- Similarly, the greater the value of creditors, the longer the repayment period will be. Like with informal repayment plans, should your circumstances change over time as they do indeed tend to do, and you are unable to keep to the terms of the debt management plan, then the plan may be terminated and you find yourself back at the mercy of your creditors and exposed to any action they may choose to take against you.
As stated many times throughout this site, everyone’s situation is different and advice must always be tailored to individual circumstances. Independent, professional advice must always be sought before taking action in relation to your debts.
Please note, we are NOT licensed to undertake debt management work and the above is provided for information purposes only.