After our last article looking at IVAs, we decided to look at an alternative process for dealing with unsustainable debt. Here is a guide to debt management plans.
Debt management is a loose agreement between you and your creditors. You propose a lesser payment that you can afford and request that interest be frozen. Many refer to this as a Debt Management Plan (DMP), which is the same as “debt management.” There is no legal contract to sign, hence the term “informal.” You might pay more or less to your debts as your circumstances change.
If you expect your financial status to improve soon, debt management is a wonderful alternative. Finding a new career after being let off. Downsizing after your children have graduated from high school. If you finish your car in a few months, you’ll have a lot more money each month.
It’s also a viable alternative if you have high-priority bills like council tax or rent arrears. You make substantial payments to your priority bills and only moderate payments to your credit cards and loans in this situation. When you have paid off your priority bills, you’ll be able to pay more on your other debts.
It makes no difference if you can only pay £1 per month on each of your loans in these circumstances. This is known as a token payment Debt Management Plan.
People can also use debt management as a long-term strategy for paying off all of your bills. This won’t work if you’re on a token payment DMP, but if you pay a decent amount each month, your debts will decrease because all of your money will be used to pay off the balance rather than interest.
Many people feel concern about commencing debt management more than they need to be. This results in them putting it off for far too long.
If your DMP is going to last a long time, you may have to deal with a variety of issues. Examples include work problems, the need to replace a car or home item and more. Also consider the need to relocate, retirement, having a new baby, divorce, and so on. Paying a fixed amount for eight, ten, or even more years may be unreasonable.
Fine if you know your position will improve. However, if you have a long DMP, you should consider your other options.
You don’t need to hire a firm to create a DMP. You can do it yourself by writing to each of your creditors and explaining that your circumstances have changed and that you will be unable to make your regular monthly payments. Offer them a predetermined amount each month in exchange for interest and charges being frozen. Rather than a DMP, this is commonly referred to as making plans to pay.
If you are comfortable writing letters, doing this yourself has numerous advantages because it puts you in control of your finances and allows you to make changes if your income or spending change. Also, most DMP management businesses have a minimum payment requirement, which you may not be able to meet.
Some organisations, like as StepChange and Payplan, will administer a DMP for you without charging you anything, ensuring that all of your payments go to your creditors.
You should contact StepChange or Payplan by phone or email to set up a phone consultation to explore your circumstances.
If they propose that you take a different method to dealing with your debts, listen carefully and ask them to explain the benefits of doing so.
If a firm agrees to set up a DMP for you, they will require written confirmation and will explain the procedures. You may still receive calls and letters from your creditors for the first month or two, but as the DMP progresses, you will no longer receive them.