Setting up a debt management plan
If youre struggling to meet repayments on money you owe, you could consider setting up a debt management plan. Check if its the right option for you and do some research to find the best provider to set up and run your plan.
What is a debt management plan?
A debt management plan is an agreement between you and the businesses you owe (your creditors) to make a set monthly payment.The plans are managed by companies known as debt management plan operators or providers, who will negotiate with your creditors and manage the payments on your behalf.
Your monthly payment is based on how much you can afford to pay. This payment is then distributed fairly between all your creditors.
Starting a debt management plan means that you are making a new promise to repay your debts in full.
When your debt management plan is being set up, your creditors will sometimes agree to freeze any interest charges. But bear in mind that they dont have to agree to this.
And they dont have to agree to your plan at all. If they dont, they can also continue to contact you, ask for payment or even take you to court if they choose.
Debt management plans can only be used to pay unsecured debts money that you owe that hasnt been guaranteed against your property, for example.
Some companies will charge you a fee for this, while others provide their services to you for free. Its a very good idea to get some advice before setting up a plan with a provider (see the section Get free advice about your debt below).
Advantages of debt management plans
The advantages are:
- making one regular monthly payment allows you better control over your finances
- your creditors may agree to freeze interest and charges on your debt and may stop other action like taking you to court (although they dont have to)
- peace of mind in many cases, you will no longer be contacted by your creditors or debt collectors
- if you complete the plan, your unsecured debts will be cleared
Disadvantages of debt management plans
You should bear in mind that:
- your debts must be repaid in full they will not be written off
- creditors dont have to enter into a debt management plan and may still contact you asking for immediate repayment
- mortgages and other secured debts are not covered by a debt management plan
Can you afford a debt management plan?
You can only enter into a debt management plan if you have some money left over every month once all your essential expenses have been paid.
Its a good idea to draw up a budget, including your monthly income and all your essential monthly household expenses. Essential expenses are bills like mortgage or rent, utility bills, Council Tax and hire-purchase payments.
If you have a very small amount left over after all these have been paid or nothing at all you should consider other ways to manage your debts.
Choosing your debt management plan provider
When choosing a debt management plan provider, you should make sure that:
- the provider is licensed by the Office of Fair Trading (OFT)
- the provider discusses all the possible options available to you to deal with your debt problem
- youre told clearly at the start how much it will cost to arrange the plan and who will pay that cost
- you understand what will happen if the provider stops running the plan for you because youve missed payments
- youve checked with other providers to make sure youre getting a good deal
Check the terms of your plan
Before starting a plan, the operator should make clear to you the terms and conditions, including:
- how much money youll be expected to pay each month, and for how long
- the reasons the provider might stop operating the plan for you for example, if you dont make the required monthly payments
Get free advice about your debt
Setting up a debt management plan is an important financial commitment so its a good idea to get advice to make sure its the right option for you.
You can get free, impartial advice on debt management plans or any kind of debt problems from a number of organisations.
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