Debt Management Plans

Debt management plans are a suitable option for those whose financial problems are only temporary and who have the means of repaying any debt if their finances are organised better.

What is a Debt Management Plan?

Simply put, a debt management plan is a program in which a person can gain greater flexibility over their monthly payments for their various debts including loans, credit cards and in some cases mortgages. It is an informal arrangement between a borrower and their lender (or lenders) to extend the period of time over which any money has to be repaid, so making a person’s debts easier to manage. It can be looked at as a limited form of debt consolidation that does not involve the taking on of new debt, and also as an informal alternative to agreements such as Individual Voluntary Arrangements, Debt Relief Orders or even bankruptcy.

Debt management plan services are usually taken out with the help of a specialist debt company. Debt management companies act as the middle man between borrowers and lenders (whether newer online lenders and payday loan companies, or more traditional types of lender such as building societies and banks) as they receive all of their client’s debt payments which they will subsequently allocate to the right lenders – resulting in a hassle free process.

Free Debt Management Plans

Though they essentially provide the same standards of service, these companies are either free charities and government organisations or fee-charging commercial companies.  As well as giving free debt advice, non-fee charging companies/charities are able to offer free debt management plan products which do not involve any set-up or on-going fees – ideal for those who cannot afford to pay for help. Free debt management plans can also provide clients with the same deals as fee paying ones as advisors are usually able to negotiate with lenders to accept lower payments or obtain interest rate freezes.

Borrowers can enter debt management plans that are tailor-made to suit their circumstances. Companies will calculate their client’s disposable income which will be assessed by creditors who will then decide whether to extend the repayment term and, if so, how long it can be extended for. Online debt management plan pages can help people work out if they would qualify for this financial aid, while online debt management plan calculators can be used to give debt companies an idea of a person’s total debt amount, their monthly disposable income and how many lenders they owe.

Once in a debt management plan scheme, customers will be contacted by their provider for a debt management plan review. Debt management plan reviews are usually conducted twice a year to ensure that a person is still making monthly payments that are affordable for them but equally fair to their lenders. This review process also helps to keep borrowers informed about other options if their financial situation either improves or worsens.

Debt Management Plans and Credit Ratings

However, because opting into such a scheme breaks the financial contract with a lender, it is likely that a borrower’s credit rating will be affected. After a bad debt management plan, credit rating issues may result in more expensive consumer credit products in the future or a person may find it hard to obtain further credit altogether. Before making a decision therefore, debtors are advised to work out if they could otherwise get out of debt by better budgeting or increasing their income and reducing their outgoings and should consult an online debt management plan calculator before approaching an adviser.