A debt management plan is designed to simplify paying back your unsecured debts. It can reduce the size of your monthly payments, and it can allow you to just make one payment per month, which will be shared out between your lenders.
You can arrange a debt management plan by yourself or you can ask a debt management company to arrange it for you. This article refers mainly to professional debt management plans.
Who is eligible?
You must be unable to afford your current debt repayments.
You need to have more than one unsecured debt.
Once you have covered your essential costs every month, for example your mortgage repayments, you must have a reasonable amount of money left to pay your unsecured debts off.
Your income must be stable enough to contribute towards your unsecured debts each month.
What are the advantages?
If your lenders agree, you will pay a lower amount of money each month over a longer period of time. This will make your debt more manageable.
Your lenders may agree to freeze any interest and charges. This means that your debts will not be growing while you are paying them off.
You will benefit from knowing that you have a clear path out of debt. You will know how much you will be paying per month and how long it will take you to clear your unsecured debts.
If you are on a professional debt management plan, somebody will deal with your lenders for you. You can focus on paying the money back while a debt professional deals with all your letters and phone calls.
What are the disadvantages?
If you participate in a debt management plan, you will be making lower payments than originally agreed. Making lower payments on your debts will negatively affect your credit rating for up to six years.
Making lower payments can also mean you pay more interest in total (if your lenders don’t agree to freeze it).
You will have little money left over to spend on non-essentials, as almost all of your disposable income is meant to go towards paying off your unsecured debts.
If your income changes, for example if it drops drastically, your debt management plan could fail if it’s no longer be the best way to pay back your debts. If your income rises, however, you may have to pay more towards your debt management plan (which means you’d be out of debt faster).
If you are not sure what to do about your debts, contacting a debt professional will help you decide what’s best.
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