In the current climate, debt management is big business. Dozens of debt management companies (DMCs) have sprung up over the last few years, having found a way to capitalise on this growing market, while at the same time claiming that they can help you out. There are two questions to ask yourself when thinking about involving a DMC: Firstly, do you really need one? Maybe you can formulate your own debt management plan and deal with creditors yourself. Secondly, under what terms do they operate? It may appear to be a free service, but all too frequently you will get talked into signing up to debt management service which is not free.

Debt Counselling

There is a huge selection companies offering debt counselling over the phone, nearly all of whom offer a free service. There are publicly funded organisations such as Citizens Advice Bureau and  National Debtline, as well as not-for-profit charities such as Payplan and the Consumer Credit Counselling Service. There are also a host of other organisations who also offer debt counselling via a freephone number. The important thing to note about any of these companies is that they may advise with a view to getting you to agree to one of a range of a debt solution services. And these services are likely to incur a fee.

Debt Solutions

Debt management companies (DMCs) will offer the following options as debt ‘solutions’:

  • Debt management plan
  • Individual voluntary arrangement (IVA)
  • Debt consolidation

Some companies, such as Payplan, get their fee from the credit industry rather than from you. The majority however are not offering the service out of the goodness of their hearts and must recover their fee somehow. This may be done in a number of ways – an up-front or set-up fee, a monthly management fee, or as a sum which is incorporated into the new debt. It is something to be aware of before you commit, although this information may not be immediately obtainable.

As a first step, you may want to deal with your own debts rather than involve a third party. National Debtline can send you a self-help pack which will enable you to do this (there is a link at the bottom of this page). The process involves assessing your income, expenditure, priority debts and non-priority credit debts. You can then choose to deal with your creditors yourself, by using the forms and letters in the pack to make offers of payment to them, in line with your personal budget.

Debt Management Plan (DMP)

A Debt Management Plan or DMP will be managed on your behalf by a debt management company (DMC) who will negotiate with your creditors to reduce your payments and potentially freeze interest payments. In turn you must pay them one monthly fee, which they will divide up and divide amongst your creditors for you. Additionally, if you are being pursued by debt collection agencies (DCAs), you can also request they deal with the DMC rather than with you. However, this is not a free service and the fee you pay will usually be integrated into your monthly fee. The reduced payment may seem like a good option, and it can be, but there are implications of managing your finances in this way:

  • DMPs are suitable for smaller, short-term debts and for individuals who own their own home and have a regular income.
  • The lowering of monthly payments will extend the repayment period of the debt as a whole. And a longer term means more monthly fees payable to the DMP agency.
  • Despite assurances from the agency, they may not be able to get your creditors to agree to the reduced payments or freezing of interest. Therefore they cannot guarantee that your creditors won’t take action against you.
  • DMCs usually only deal with non-priority debts, leaving you to deal with more serious debts such as mortgage or council tax arrears
  • Your credit file will contain details of your DMP, which will affect your ability to get credit in the future.

Individual Voluntary Arrangements (IVAs)

An IVA is similar to a DMP but involves more serious sums of long term debt (more than £15,000). This option involves commissioning the services of an IVA provider, who will negotiate with creditors and manage the debt on your behalf. The IVA provider must first get your creditors to agree to write-off a portion of your debt, so that you can make monthly repayments you can afford. The repayments will be spread over 5 years and the arrangement will take the form of a legally binding agreement. The agreement will be presented to you in the form a proposal which will agreement will then be legally binding. An IVA is a good alternative to bankruptcy for those suffering under major longer term debt, although there are some significant implications:

  • The potential for disproportionately high arrangement fees payable to the IVA provider which are added on to the overall cost. Shop around.
  • Because it is a legally binding agreement, your failure to keep up the repayments may lead to bankruptcy
  • Your credit file will contain details of your DMP, which will affect your ability to get credit in the future.

Debt Consolidation

Unlike a DMP or an IVA, a consolidation loan is the borrowing of more money to pay off existing debt. It is frequently offered as a solution to the problem of a having debts are spread across a variety of sources such as loans, credit cards and unpaid bills. While a consolidation loan will tie up all your existing debt and reduce the amount of money you have to pay as a whole, it is important to be aware of the following:

  • Consolidation loans are only offered to homeowners, which means it is secured on your home. This has two implications: firstly it is not a regulated credit agreement and you will not have the benefit offered by the Consumer Credit Act. Secondly failure to keep up repayments may mean repossession.
  • The lowering of monthly payments will extend the repayment period of the debt as a whole.
  • You will have additional fees to pay to the loan provider which will increase the total amount you have to pay back.

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