A debt management plan is designed for UK residents who are having financial difficulty maintaining contractual payments to unsecured creditors. An individual or a debt management company can arrange a debt management plan, which involves making a single monthly payment for all debts, a portion of which is allocated to each creditor. Agencies like the Consumer Credit Counseling Service provide debt management plans at no charge, while some debt management companies charge a fee.
The debtor is expected to make the agreed monthly payment to the plan administrator for the duration of the debt management plan. The goal is this plan is not to write off debt but to make it more affordable for a consumer to repay debt. However, situational changes like reduction or loss of income can make this difficult. If the debtor becomes unable to afford the payments stipulated by the debt management plan, he or she should immediately notify the plan administrator.
A debt management plan will only be a smart debt solution if the debtor can afford to repay debts. The individual should have money remaining each month after paying living expenses and other priority debts. The best way to determine this is to create a budget that includes the monthly income and essential monthly expenses like rent or mortgage, utility bills, food expenses, hire-purchase payments, and Council Tax. If only a small amount of money remains after these items have been paid, another debt solution may be more effective.
Since a debt management plan is an informal debt solution, it offers flexibility. Payments can be increased or decreased based on the financial situation of the debtor. The plan administrator should be informed of any changes in financial status. This individual will then help the debtor determine whether the debt management plan should be adjusted as a result.[needhelp01]
The plan administrator will reassess income and expenses and if warranted, determine a revised monthly payment. This figure will then need to be approved by each covered creditor. Though creditors are under no obligation to approve the initial proposal or this revised one, they often do because they realize it offers the greatest chance of them being paid.
Taking these steps as soon as there is a change in financial status is important because it can prevent the debtor from slipping deeper into financial trouble. Defaulting on debt can lead to severe consequences and may force an individual to file for bankruptcy. It is much easier to deal with the situation before things become this serious.
Consumers should realize that a debt management plan will not prevent creditors from making calls and sending letters regarding covered debts. Since they will be in default of their original credit agreements, consumers may receive default notices from creditors exercising their legal rights. A debt management plan may have a negative effect on the credit rating of the debtor because the contracted payments are not being made. However, making payments regularly through the debt management plan can have a positive impact.