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Debt Management Plans

Monday, 27th April 2009

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Are you currently in a Debt Management Plan (DMP) or thinking of starting one?

If you are then why not have a look at our unique Debt Fee Saving Calculator? to see how much you could save in fees, it may well be thousands of pounds. Just slide the counter along or hit the + or - sign to work out how much.

Example, if you enter £15,000 debt with the payment of £300 per month into the calculator then you will pay around £3,672 in fees alone. This is the average amount you will pay in addition to your debts in the plan to a 'fee charging' debt management company. Your plan will then have to run longer to meet those fees.

Free Debt Management Plans (DMPs) - the key points

If you decided to enter into a Debt Management Plan with your unsecured creditors then DebtWizard will refer you to a third party that will not charge you fees this means that every penny you pay in to the plan will go towards clearing your debts. This could save you thousands in fees and shorten the time you have to repay into the plan when compared with a fee charging firm.

The key points of a Debt Management Plan

  • No fees, no charges, no admin costs
  • One affordable monthly or weekly payment
  • Possible to get the interest and charges frozen
  • You will be able to view your DMP online
  • Access to free budgeting advice
  • Ongoing debt plan support

Q & As on Debt Management Plans

What do debt management companies, DMCs, actually do?

They offer a service whereby they act as a go-between for someone who owes money (often referred to as the debtor) and the lenders (known as creditors) that the debtor owes money to. The debt management company makes an arrangement with the creditors on behalf of the debtor. Once the debt management plan is ready the debtor starts making a payment to the debt management company, they in turn distribute that payment to the creditors.

How do debt management companies get paid?

There are simply two types of debt management companies -

  • Firms that will charge you
  • Firms that will charge the creditors instead

Debt management companies that will charge you

Basically these firms will charge you every time they distribute a payment to your creditors; this payment is usually around 15% to 18% your monthly payment. For example, you pay £200 per month to the debt management company they will take on average £35.00 for professional fees, therefore your creditors will receive pro rata payments of the remaining £165.00.

Debt management companies that will not charge you - the debt charities

Debt charity - 100% of your monthly payment will go towards your creditors and in return the creditors give the debt advice charity a commission or donation. This will reduce the time period of any repayment plan that you have because you are actually paying that little bit more each month. For many consumers this works well. It is all down to individual choice of the consumer based upon the merits of each case.

DebtWizard - If we refer you for a debt management plan you do not pay us a fee. Your enquiry will usually be dealt with on the same day of contact or within a few days.

Important note

It does not matter which debt management company or debt advice charity you use as it is up to each individual creditor whether they wish to stop applying interest and charges to a debtor's account. Therefore this has no bearing on selecting one debt management company in preference to the other or for a particular debt advice charity in the hope that creditors will stop the interest being applied.

Have you see our Debt Fee Saving Calculator? It works out much you will be paying in fees in a DMP and how much longer the plan will run, just to pay those fees! 

Take me to the Debt Fee Saving Calculator

Debt Management Company (DMP) - Pros and Cons

There are pros and cons for using either of the fee charging or non fee charging debt management company as detailed below.

There are three main advantages for using a debt management company;

Advantages (Pros)

  • The borrower does not get involved in negotiations with their creditors, this is carried out by the debt management company.
  • Only one monthly payment to the debt management company - borrower feels the debt is under control.
  • Your monthly payment is set at an affordable level following an analysis of your income and expenditure.

Disadvantages (Cons)

  • Some debt management companies will charge a set-up fee as well as a monthly administration charge
  • Any rescheduling of debts will most definitely affect the borrower's credit rating
  • Creditors are not bound by the arrangement and can take legal action to recover their losses.

An important point to bear in mind is the fact that when using a debt management company, debt charity or DebtWizard it does not guarantee that that the debtor/borrower will no longer receive any further communication from a creditor.

Creditors can continue charging interest and further costs to the outstanding sum but most debt management companies will work with your creditors to try and stop this. So if you are making a low monthly payment in comparison to your level of debt in the debt management plan then be aware that the debt can increase and take longer to clear.

Example when not to use a debt management company

  • If interest and charges are not frozen by the creditor and the level of debt is increasing then seek further advice.
  • If the repayment period is unrealistic due to the high level of debts and an Individual Voluntary Arrangement, IVA, may reduce the term down to 60 months.

Find out more about - What is an IVA?IVA Pros and ConsIVA Information / IVA Fees

Example when to use a debt management company

They can be useful when the debts are on the lower side and no other option is available or when a temporary solution is required until someone is able to sort out their finances for example to arrange a full and final settlement such as a consolidation loan or an Individual Voluntary Arrangement, IVA.

Click here to see the Debt Solution Comparison Table on how bankruptcyindividual voluntary arrangements, IVA's and debt management programs compare with each other.

I have decided to use a debt management company what will happen when I contact them?

The debt management company will request the following;

  • Your personal details
  • Names and addresses with account/reference numbers of your creditors
  • Details of any solicitors' debt recovery agents representing creditors
  • Details of your income and monthly expenditure such as mortgage, rent, car costs and household expenses
  • From this budget sheet the debt management company will be able to establish how much you can afford to pay in to the plan

The debt management company is now ready to write to your creditors and explain your circumstances. The firm will try and do the following;

  • Stop any further interest and charges being applied to your accounts
  • Try to prevent the creditors progressing legal activities

Before I contact a debt management company I wish to work out myself how much I feel I can afford to pay into such a plan, how can I do this?

Click on our much acclaimed budget wizard to help you plan your finances, a must for anyone already in debt and for those who wish to avoid any further debt.

Word of caution

Whatever solution you choose be careful not to continue to build up debt through continued use of credit cards, store cards and overdrafts. Otherwise your debt problem will increase and this could jeopardise your current arrangement.

Need to ask a question about free debt management plans?

Why not visit our forum.

Don't forget to have a look at Debt Management Plan fee saving calculator on our home page. Why pay fees?

The fee saving calculator works out much you could save and how much longer the plan will run, just to pay those fees!

 Take me to the Debt Fee Saving Calculator

 

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