Where necessary, debt management is offered in the form of a Debt Management ‘plan’ which allows the client to repay what they can afford to their creditors on a monthly basis. This is a repayment plan that allows the client to repay their debts in descending order, according to how much money is owed to each creditor; for example, the more the client owes to a creditor, the more they pay on a monthly basis out of their budget negotiated through the debt management company. This is distributed to creditors in document form in a ‘Financial Assessment’.
Debt Management Plans are distributed by Debt Management Companies, some charge a fee which is taken from the client’s budget, sometimes a ‘set-up fee’ is charged, however, some are free of charge: examples of free Debt Management Companies below:
CCCS (Consumer Credit Counselling Service)
CAB (Citizen’s Advice Bureau)
Christians Against Poverty
National Debt Line
Debt management plans allow the client to pay smaller, more manageable payments to each creditor through a lump sum they pay the Debt Management Company, when an arrangement has been reached with a creditor, they may be able to freeze or reduce the interest owed depending on the financial product.
The financial assessment is a breakdown which assesses income and expenditure. Monthly income and expenditure is recorded, along with the total amount the client owes in debt and a list of the affected creditors. The financial assessment is to be tailored to each creditor according to how much they can repay monthly, as this is pro- rata according to how much is owed to each creditor.
Debt management companies will not only make sure the highest debts are paid off the quickest, but they will also make sure ‘priority debts’ are paid first and foremost. Priority debts are those that carry serious consequences if left unpaid, such as council tax (which could lead to court proceedings) and mortgages (which can be repossessed by the lender if left unpaid).
This act was updated on 1st October 2008 to include regular contact between creditors and borrowers, which means an annual statement is to be sent to borrowers stating the amount owed contractually and notices are to be sent when credit accounts fall into arrears (when a credit account is unpaid after a payment due date for one or more months or when a credit limit is exceeded.)
Annual statements are issued whether the debt has been charged-off to a debt recovery agency or not.
These must be delivered to the client before and legal action or other intervention is taken concerning the debt. These notices detail the amount of money that is owed in the form of missed minimum payments (required monthly) and money owed outside the credit facility (such as ‘over limit’ amounts which may include over limit charges). When Default notices are not responded to, the creditor may start court proceedings against the client and apply for a CCJ (County Court Judgement), it is therefore important that when a client receives a default notice, they contact the creditor and make arrangements for the outstanding amount to be repaid.
Debt management plans are negotiated to decrease monthly repayments often with reduced/frozen interest and charges, but this does not mean that the client will avoid a Charge-off or ‘Write-Off’ of their debt to a Debt Recovery Agency. Such activity will remain on a client’s credit file for 6 years from the time of entry.
Full and Final Settlement offers may be accepted by creditors when debts are deemed as otherwise ‘uncollectable’. A settlement offer is an amount less than the total owed to the creditor, offered to be paid in a lump sum to clear the debt, if the creditor accepts, it is deemed as settled or ‘satisfied’ and no further collection action will be taken on an account. When the client is in a debt management plan, the settlement of the debt in a full and final offer may be negotiated by a representative of the Debt Management Company.
It is not the Debt Management Plan that will affect your credit file; rather it is the impact of missed/insufficient payments that will have a negative impact. This is because the contract entered into at the time of agreeing to the credit facility has not been honoured, taking this into account, by the time a client takes the step of agreeing to a Debt Management Plan, the damage has already been done to their credit file.
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