Like many people you may have heard the term Debt Management but not know exactly what it is.
Debt Management describes a service that helps consumers reduce their payments if they are struggling to make their payments. A Debt Management Plan is concerned with reducing your unsecured debt monthly payments to a level you can afford. This is reviewed typically every six months with the ultimate aim to get your payments back to the original level once your debt difficulties have improved.
How Debt Management Works
Let’s take a closer look at how this works in practice.
The Debt Management Company will initially get a detailed picture of your finances.
It’s essential you tell your Debt Management Company everything. Holding back debts or other information could jeopardise the whole debt management plan.
With your help they will detail any income you and go through your expenditure. The expenditure will include every day expenses like clothing, food, insurances, utility bills, council tax and even Sky TV payments to name a few.
They will also include in your expenditure mortgage or rent payments plus any car payments. Payments like mortgage, rent, car or any loans secured on your home are called priority payments. This means a good Debt Management company will make sure that you have enough money to make these payments before they consider payments to loans or credit card companies.
At this stage the Debt Management Company will have an accurate figure of what you can afford to pay towards your unsecured creditors (credit card companies, catalogues and unsecured loans).
So let’s assume the customer has an income after tax of £2,000 per month. Their expenditure (excluding non secured loans and credit cards, catalogues etc) is £1,800.
This leaves £200 towards payment of their unsecured debt.
If their monthly unsecured debt payments equalled £200 or less, they would not be eligible for Debt Management.
Let’s assume their monthly debt payments were like this;
Unsecured Loan £150
Unsecured Loan 2 £220
Barclaycard £90
Egg Card £140
Catalogues £50
This would give a total monthly debt payment of £650 against an available income of £200. Clearly this customer cannot meet their debt commitments so would be eligible for Debt Management.
The Debt Management Company would contact the lenders and attempt to reduce the total payments down to a total of £200 per month. The payment is split between the lenders on a pro-rata basis, so the largest debt (outstanding not monthly payment) gets the biggest proportion of the payment.
So the new payments to a lender on a monthly basis might look like this.
Unsecured Loan £46 (was £150)
Unsecured Loan 2 £68 (was £220)
Barclaycard £28 (was £90)
Egg Card £43 (was £140)
Catalogues £15 (was £50)
Any good Debt Management Company will also attempt to get your interest frozen that your debt is reducing rather than increasing. This is essential if you don’t want to fall deeper and deeper in debt.
Typically these plans are reviewed every six months. If your income goes up in the interim you should contact your Debt management Company so that you can increase your payments.
In summary Debt Management helps people who cannot pay their monthly debt repayments by agreeing reduced payments with their lender. You should note that any reduced payments will be noted on your credit file. Once you agree lower payments with your lender make sure you make those payments and if you can’t get hold of your Debt Management Company as soon as possible.