Debt management is a state of arrears that usually involves working with a professional debt management charity or organisation to consolidate all your existing debts and pay them off through one account.
If you are unable to repay your payday loan or debt, your creditors will always try to offer you a more flexible way to repay – typically a pay plan or arrangement.
However, if you have several outstanding forms of unsecured debt across personal loans, payday loans and credit cards, you may find that debt management is the best way to consolidate all your debts and pay them off.
How Do People Get Into Debt Management?
With over 8 million people in the UK struggling with some kind of debt, it is unsurprising that people can fall behind on repayments. Whether it is due to illness, divorce, unemployment or a surge of unexpected expenses, it can be hard to pay all your creditors on time.
If you are having a hard month and have companies asking for money, it can be tempting to continue borrowing from other lenders or credit card providers in order to pay them off – but this can start to catch up on you and lead to a spiral of debt.
Struggling with debt can seriously affect our health and ability to cope with everyday life – so it is important to find a way to overcome it.
How Does a Debt Management Plan Work?
You can approach a debt management company or charity or you may find that they will approach you. If you have applied for a credit product but do not make the grade due to your credit score or outstanding debt, you may find that debt relief is a product that is even recommended to you.
Examples of debt management companies in the UK include StepChange (charity), Harrington Brooks, PayPlan and Gregory Pennington.
Step 1: The debt relief company start by compiling a list of all the creditors you owe. Your representative will then contact each credit provider one-by-one and state that you are in a position of debt management and this will cause them to freeze interest and stop any arrears letters, calls and emails. (Source: Citizens Advice Bureau)
Step 2: All your income, expenses and payments are organised into a budget plan. You will have a very clear understanding of how much money you can use for food, rent, entertainment, gym and other necessities. Your outstanding debt is organised in an order of priority and typically the repayment cost is spread out over a long period of time. For instance, if you owe a company £100, you may find that you are repaying £5 per month for the next 20 months.
Step 3: Your allocated income goes directly to the debt management company who will give you money each month for your allocated expenses and spend the portioned amount on repaying your loans each month until you eventually become debt free. There is an emphasis on consolidating your debt, so you are only paying into one account and therefore do not have to contact and pay each creditor one-by-one.
If you receive an injection of income, through work, inheritance or other, you may find that you are in a position to clear your debts earlier and your debt management company will help you process this.
Your DMP counsellor will also
- Talk directly with your creditors on your behalf.
- Help you ensure that you make the agreed payments on time.
- Give you regular updates on what payments you have made and what’s left to pay.
- Puts all your debt into one loan
- No more being chased by lenders and debt collectors
- A systematic way to pay off your debt and eventually be debt-free
- If you go through a debt management company, some firms charge ‘set up’ fees – not very appealing for someone who already has money troubles.
- Surrender your financial freedom as you are required to keep to the strict repayment schedule
- Need to keep your job and receive income otherwise you will fall behind on payment
- Repayment can take many years to clear
- The DMP may show on your credit record, making it harder to get credit in the future
Some companies will charge a setup fee and/or a handling fee each time you make a payment. It’s important to remember that if you don’t want to pay a fee you don’t have to. There are several free providers and charities out there – you just need to choose what’s best for you.
What are the Alternatives to a Debt Management Plan?
Broadly, there are two types of debt companies – charitable services that offer free advice, and debt management companies that charge a fee.
The likes of the Citizens Advice Bureau (CAB), National Debtline and the StepChange Debt Charity give you the opportunity to have a one-on-one session with someone paid to help you rather than make money from you. They use a variety of techniques and can help you organise a debt management plan.
These services should not be confused with companies offering ‘free help’. Many commercial companies claim to be free but have other ways of charging you.
Remember you should never pay for advice, and there is nothing to stop you shopping around – so even if you obtain free advice from one company, you could still use another.
If you have problems with secured and/or unsecured debts, there are other courses of action open to you such as an Individual Voluntary Arrangement (IVA), and there are plenty of organisations that are there to advise you.
Your first step should be to go to your Citizens Advice Bureau who will advise you where to go for help.
Remember, no matter how bad a situation you may think yourself to be in, there is always help out there – all you have to do is seek it out.