How a debt management plan works

12 September2011

If you can no longer afford to repay your unsecured lenders as originally agreed, a debt management plan could help you to get back on top of your repayments - and give you a clear route to repaying your debts in full.

Let's look at how a debt management plan works, so you can know what's involved before deciding if it might be a suitable approach for you.

What is a debt management plan?

A debt management plan is an informal agreement between you and your unsecured lenders, designed to help you if you can no longer repay your debts as you originally agreed.

Your lenders would be asked to accept lower monthly payments that you should be able to afford, as they'd be calculated after all your essential living costs (such as rent/mortgage, food & utility bills) have been covered.

If your unsecured lenders agree to the plan, you'll start making one affordable payment every month to the debt management company you're working with, who will then distribute the agreed amount to each of your unsecured lenders.

Your lenders don't have to agree to a debt management plan, but if they do, they may also agree to freeze or reduce interest and charges on your debts, which means they won't continue to grow as you're repaying them.

Having said that, if your lenders don't agree to freeze or reduce the interest or any other charges, making smaller payments over a longer period could end up costing you a fair bit more overall, as your debt will accrue interest over a longer period too.

Making smaller payments on a debt management plan will also show up on your credit file for six years, which may affect your ability to get credit during this time. Having said that, your lenders wouldn't accept a debt management plan unless you actually couldn't keep up with your payments, so there's a good chance your credit rating has been affected already.

What are the advantages of a debt management plan?

A debt management plan could give you a clear path out of debt, since it is designed to help you clear your debts in full at a rate you can afford.

Agreeing a debt management plan could allow you to make monthly payments calculated after your essential expenses have been covered, so you can be confident that you're working your way out of debt at an affordable rate - and that all your financial commitments are being taken care of.

What are the disadvantages of a debt management plan?

You'll be expected to pay as much as you can afford towards your unsecured debts on a debt management plan, so you'll have little to spend on non-essentials every month after you've made your payment and covered all your essential costs.

And if your income increases, you'll more than likely be expected to contribute this extra money towards repaying your unsecured debts. On the plus side, that does mean your debts will be repaid faster than if you were still making smaller payments.

Similarly, if your income drops, your debt management company might be able to negotiate smaller payments to help make sure your debt management plan succeeds.

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