Types of debt management plan

A debt management plan can be a very effective way of tackling unmanageable debts. By reducing your monthly debt repayments to an affordable level, it can help you make sure you can afford all your other costs every month.

Basically, a debt management plan can be arranged in two ways: by you alone, or with the help of a debt management organisation. Here we look at how a debt management plan works, and how it can help you.

How debt management can help

A debt management plan is an informal arrangement with your unsecured lenders. You`ll arrange to repay your unsecured debts in smaller monthly amounts - in line with what you can afford once your essential costs have been covered - over a longer period of time.

It is often possible to negotiate a freeze or reduction in interest and other charges, stopping your debt getting any bigger.

It`s possible to arrange a debt management plan on your own, by negotiating directly with your lenders. To do this, you`ll need to look at how much you owe (and to how many lenders), as well as how much you can afford to pay each month, and divide this amount between your lenders on a pro rata basis (depending on how much you owe to each). You`ll then need to explain your figures to them and show them that this is the most realistic way of repaying your debts - that it`s the best solution for them, as well as for you.

However, this can be a time-consuming and complex process, and many people prefer to arrange their debt management plan through a debt management company. A debt management company can negotiate with your lenders on your behalf, and help with the day-to-day running of the debt management plan. They can also act as a point of contact between you and your lenders if any issues arise while your debt management plan is underway.

Is a debt management plan right for me?

Debt management plans are suitable for many people with unmanageable debts who cannot afford their existing repayments, but could afford to repay the whole debt over time. You will have to demonstrate this to your lenders before they will accept the terms that are being proposed.

Also, be aware that repaying your debts more slowly means you`re not sticking to your original repayment agreement. So it will have a significant impact on your credit rating for six years (whether you negotiate with your lenders yourself or work with a debt management organisation) and can end up costing you more, as your debt will be attracting interest for longer (unless your lenders agree to freeze interest, of course).

You shouldn`t enter into a debt management plan unless you are sure it is the right option for you, so it pays to discuss your options with a professional debt adviser before you commit yourself to anything.

For more information on debt management and other debt solutions, click here or call our expert debt advisers on 0800 195 2911.

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