What is a Debt Management Plan?
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 Companies
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
How Do Debt Management Plans help?
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).
Consumer Credit Act 2006
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.)
For more information on:
- Default Notices
- Debt management and Charge-offs
- Full and Final Settlement offers
- How will my credit file be affected if I enter into a Debt Management Plan?