A debt management plan is one of several ways to handle UK debt. Consumers who find themselves struggling to make debt repayments come to an agreement with their creditors to pay a set amount each month.
A company called a debt management plan provider or operator handles the negotiations and manages the debt payments on behalf of the debtor. This is an easy way to get out of debt without having to go through the legal process involved with bankruptcy.
The monthly payment arranged under this plan is based on what the debtor can afford to pay. It represents a promise to repay covered debts in full without any reductions or write offs.
However, creditors may agree to freeze interest charges to prevent the debt balance from increasing. The debtor makes a single monthly payment that represents the installment for each covered debt. The plan provider or operator divides this payment amongst the covered creditors.
A creditor is not obligated to agree to a debt management plan…
However, many creditors do because it enables them to recoup money that they could not through debt management arrangements like a Debt Relief Order or bankruptcy. Only unsecured debts, those that are not guaranteed against assets, can be included in a debt management plan. If a creditor does not agree to the plan, it may continue to take collection action and may even take the debtor to court.
Some companies charge a fee for debt management plan services, while others offer their assistance at no charge. Consumers should contact an organization that provides free and independent advice before they establish a debt management plans. Some of these groups offer free plans to qualifying consumers, saving them money on debt repayment.
These plans have several advantages including the ability to control finances through a single monthly payment
Covered creditors will stop making calls and sending letters and may even agree to freeze interest and other charges. Once the plan is completed, covered unsecured debts will be cleared, allowing the individual to focus on being financial responsible in the future.
Though debt management plans are effective solutions for many people, they are not without their disadvantages. Debts cannot be written off under these plans so they must be repaid in full. Creditors have no obligation to agree to a debt management plan and may instead opt to pursue immediate repayment.
Secured debts such as mortgages cannot be included in the plan so consumers with this type of debt should consider alternative debt management arrangements.
To qualify for a debt management plan, a consumer must have enough money remaining after essential living expenses have been paid. The provider or operator should be licensed by the Office of Fair Trading and should reveal the plan costs, monthly payment amounts, and duration of the plan up front.
Consumers should also inquire about what will happen if they miss any plan payments. Advice from debt experts will help consumers determine if a debt management plan is the right choice.