Why debt management?

8 September2011

Repaying several unsecured lenders every month isn't always easy. If you've fallen behind on your monthly repayments - whether they're towards credit cards, personal loans or overdrafts (amongst others) - you could be risking extra charges for late/non-payment, damage to your credit rating and other problems, not to mention the added stress of having debts you've lost control of.

However, if you act quickly enough and get good professional advice, you could find a good way to get back on top of your unsecured debt repayments and work your way towards becoming debt-free.

There are several solutions that could potentially help you, but here we're going to look at the possible advantages of a debt management plan.

What is a debt management plan?

A debt management plan is an informal agreement between you and your unsecured lenders in which you would ask them to accept reduced monthly payments tailored to your financial situation.

If your lenders agree to the new repayment plan, you can start making a single monthly payment to the debt management company - which you'll know you should be able to afford, as the payment will allow for all your essential living costs (from your mortgage/rent to your food budget and utility bills).

The debt management company will then distribute money amongst your unsecured lenders as agreed - so you'll only have to deal with one company.

Your unsecured lenders may also agree to reduce or freeze interest on your debts, which means they won't continue to grow while you're in the process of repaying them. However, if your lenders don't agree to this, you should bear in mind that making smaller payments over a longer period could cost you more in the long term, as your debt will have longer to accrue interest.

Are there any disadvantages to a debt management plan?

Agreeing a debt management plan means you will be expected to pay as much as you can afford towards your unsecured debts, after all your essential living costs have been accounted for. This means you'll have little disposable income to put aside from month to month, as virtually all of it will go towards servicing your debts. Having said that, debt management is only an option for people who can't afford their debt repayments, so this probably sounds all too familiar already.

Additionally, a debt management plan will remain on your credit file for six years, which can affect the cost and availability of credit during this time.

How could I set up a debt management plan?

There are two ways of setting up a debt management plan: either on your own, or with a professional debt management company.

If you don't feel comfortable sharing information about your personal finances with any 'third parties', setting up a debt management plan by yourself could be the best option.

However, being in debt can, understandably, be a stressful time for many people, and having a debt management company to deal with your lenders and distribute the money amongst them could take some of the pressure off you.

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