Debt Management Companies

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 DMC makes contact with the creditors on behalf of the debtor and then draws up a contract between the debtor and his or her creditors. Once the contract is ready the debtor pays the DMC one monthly payment, they in turn distribute that payment to the creditors. There is a charge for this no matter what DMC you use, I explain this in more detail below.

How do these firms get paid?

There are simply two types of DMC's -

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

Firms 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% plus vat which equates to 17.63% of your monthly payment. For example, you pay £200 per month to the DMC, the firm will take £35.35 for professional fees, therefore your creditors will receive pro rata payments of the remaining £164.75.

There are some firms that will ask for the first three months payment from you in advance before they actually distribute any money to your creditors. Stay away from any such firm that requests this. There are numerous other professional firms that will do the same job but with no up front payment.

Firms that will not charge you

These types of firms offer exactly the same service as above, however the criticism is that they work in conjunction with the creditors and are funded by the creditors. The impact of this is that the creditors have set specific guidelines to these firms of what they will accept for expenditure budgets such as housekeeping, mobile phone costs, hairdressing expenses etc: Some clients come to me saying that they have not been given enough money to live on, the expenditure is not realistic and they end up not completing the plan.

On the plus side 100% of your monthly payment will go towards your creditors and in return the creditors give the firm a commission similar to what the professional firms charge, 15%. This will reduce the time period of any plan that you have because you are actually paying that little bit more each month.

Important note

It does not matter which firm 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 firm in preference to the other in the hope that creditors will stop the interest being applied.

Due to the current debt crisis in the UK the fee charging firms have seen a massive increase in demand for their services because the non fee charging firms, of which there are only two, are extremely busy and can take longer to set up these plans. Debtors need action sooner rather than later and many accept that they have to pay for such a service.

Pros and Cons

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