What types of debt can I tackle with a debt management plan?

7 September2011

If you can no longer keep up with your monthly debt repayments as originally agreed, debt management could be the best approach to regaining control of your finances and getting out of debt at a realistic rate.

A debt management plan is only designed to help you repay your unsecured debts - whether they're on credit cards, store cards, personal loans, overdrafts, etc. However, agreeing a debt management plan could indirectly help you to repay your secured debts - such as your mortgage - too.

Here we'll look at how a debt management plan could help you get back in control of your debts.

What is a debt management plan?

A debt management plan is an informal agreement between you and your unsecured lenders. If you can no longer repay your debts as originally agreed, a debt management plan is a new repayment plan that could get you out of debt at an affordable rate, with reduced monthly payments.

How does a debt management plan work?

Basically, you would ask your unsecured lenders to accept lower, affordable payments that you're confident you can make every month.

If your lenders agree to a debt management plan, you can start making a single monthly payment to the debt management company you're working with, who will then distribute the agreed amount to each of your unsecured lenders. You'll be expected to pay all you can afford towards your unsecured debts, after all your essential living expenses - such as rent/mortgage, food & utility bills - have been covered.

If your unsecured lenders agree to a debt management plan, they may also agree to reduce or freeze interest and waive charges on your debts, so they won't continue to grow while you're repaying them.

However, you should bear in mind that if you make smaller payments over a longer period and your lenders don't agree to freeze / reduce the interest or any other charges on your unsecured debts, you could end up paying more in the long term, as your debt will accrue interest over a longer period too.

Also, the fact that you're making smaller payments will stay on your credit file for six years, which may affect your ability to get credit during this time.

How could a debt management plan help me with my other debts?

A debt management plan can only include your unsecured debts, i.e. it can only help you repay any debts you have on things such as credit cards, overdrafts and personal loans.

However, agreeing a debt management plan should also indirectly help you to repay any secured debts you have, such as your mortgage.

It could be the case that you're struggling to make your mortgage repayments every month because you're also repaying several unsecured debts - and the money that should be going towards your mortgage is being 'eaten up' by repaying your unsecured lenders instead.

As the consequences of not repaying secured debts (such as your mortgage) can be much more severe than unsecured debts - including the potential repossession of your home - it's important that repaying your secured debts every month is your priority.

Since the monthly payments you'll make on a debt management plan are worked out after all your essential living costs and secured debts have been covered, you can be confident that your 'priority' debts are always accounted for first.

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Tags: debt, debts, types of debt, debt management, debt management plan, mortgage, mortgages

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