Do I actually need a debt management plan?

29 June2011

A debt management plan can help those with multiple debts who can't keep up with the monthly repayments. It's an informal agreement with your unsecured lenders to make reduced payments over a longer period of time. If you enter a debt management plan, it will:

  • Give you one tailored monthly repayment
  • Let you repay your debts over a longer period of time (this can cost more overall, but will make your monthly repayments more affordable now)
  • Make it easier to manage your monthly finances
  • Give you an indication of when you will be debt free, so you can plan for the future more effectively
  • Sometimes freeze interest and charges on your debts (although creditors do not have to agree to this - or to the debt management plan itself)
  • Provide professional help making your new arrangement a success - even if your circumstances change later on.

Who could be suitable for a debt management plan?

A debt management plan may be suitable for you if you have multiple debts and you're struggling to make the repayments - but you reckon you'd be able to repay them in full within a reasonable time period.

Before you enter into one, you should consider that repaying your debts more slowly will show on your credit file for six years - meaning that if you wanted to borrow money during this time, it could be more difficult and potentially more expensive.

Who shouldn't enter into a debt management plan

If you can still afford to repay your debts and are not having difficulty meeting repayments, you do not need a debt management plan. These plans are designed to help those who are in financial difficulty and cannot meet their monthly repayments.

If you have lost your job or are not working at the moment, it's unlikely you'd have enough money to be able to make a reasonable monthly contribution towards your debts.

And if you don't think you'll be able to repay your debt in any kind of realistic timeframe, another debt solution may be more suitable than a debt management plan.

Depending on your circumstances, you could consider an IVA (Individual Voluntary Arrangement - if you can commit to regular monthly payments), bankruptcy or a DRO (Debt Relief Order). Just bear in mind that they also have long-term consequences that you'd have to understand fully before you make any firm decisions.

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Tags: debt, debt management, debt management plan, unsecured debts, unsecured lenders, IVA, bankruptcy, DRO, debt relief order, interest, credit rating

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