Debt management companies or DIY

27 July2009

For many people, a debt management plan can be an effective way of turning unmanageable debts into manageable ones.

However, as with any debt solution, you should be completely sure that it is the right debt solution for you before entering into a debt management plan.

How debt management works

A debt management plan is an informal arrangement with your creditors for lower monthly payments towards your debts, paid over a longer period of time than your original agreements.

It may also be possible to negotiate a reduction or a freeze in interest and/or other charges, which can prevent your debt from getting any bigger. As with any change to your repayment terms, your lenders don`t have to agree to this.

There are some things you should keep in mind before you enter into a debt management plan, however. If your lenders don`t agree to freeze or reduce your interest, you may end up paying more overall due to the longer repayment term, as you`ll be paying interest for longer.

You should also consider the impact on your credit rating: because you won`t be making payments in the way you originally agreed, a default will show on your credit history for each debt. This can have an impact on your chances (and possibly the cost) of obtaining credit over the six years this will stay on your credit report. You should only enter into a debt management plan if you can`t keep up with your payments as they stand and you`re sure it is the best way for you to clear your debts.

Should I go professional or go it alone?

It is possible to arrange a debt management plan on your own - essentially, a debt management plan is an alternative arrangement with your lender(s) with regard to how you intend to repay your debts.

However, negotiating for new repayment terms can be time-consuming, especially if your lenders don`t accept your initial proposal. This is one reason many people prefer to use the services of a (potentially fee-charging) professional debt management company, some of which will negotiate with lenders on your behalf - and renegotiate if your circumstances change later on and this means your new repayment terms are no longer appropriate.

Another advantage of this is that your debt management company may act as a point of contact between you and your lenders for the duration of the debt management plan. If you have any questions or queries, the debt management company may answer them. Likewise, when the terms of your debt management plan come up for renewal, they may negotiate with your lenders and attempt to renew the terms.

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