The Pros and Cons of a Debt Management Plan

Oct 12

You earn decent money, but there’s never quite enough of it to pay all your bills meaning you sometimes have to prioritise eating over heating the house.  You’re stressed, tired, fed up, the kids need new school shoes and you’ve started to dread the phone ringing and postman visiting as you know it will be another company demanding yet more money.

If this sounds familiar, then chances are you have probably already started thinking about ways you can reduce your outgoings in an attempt to make things a little bit more manageable, one of these ways may be contacting a debt management company to talk about a debt management plan.

What is a debt management plan?

A debt management plan is an informal repayment programme that you willingly enter into to help control debts that would otherwise be unmanageable.

Debt management plans are organised by debt management companies, like who negotiate directly with creditors on your behalf to change debt repayment terms with the intention of making them more affordable.

This could include things negotiating lower monthly repayments and asking lenders to freeze any further interest on the account.

Pros of a debt management plan

There are a multitude of benefits to be had from entering into a debt management plan, but here are some of the most popular reasons:

  • Takes away the stress of corresponding directly with creditors. Some creditors can be very pushy and make you feel pressured into agreeing repayments that are unrealistic.  Allowing a professional debt manager to do this correspondence on your behalf can take away a great deal of stress and worry.
  • Avoid bankruptcy. Debt management plans provide a viable alternative to becoming legally insolvent, and entering into a plan is actually a pre-requisite to filing bankruptcy.  However, if you still find you’re struggling when on a debt management plan, bankruptcy still remains an option.
  • Freeze Interest. In most cases, creditors will freeze further interest, meaning your monthly payment to them will pay off what you actually owe, rather than covering the interest.
  • Make one payment. Once the debt management company has calculated what you can afford to pay each month, and has negotiated with your creditors, you will make just one payment of a set amount each and every month.  The debt management company will then distribute this money across all creditors.

Cons of a debt management plan

There are a few things you should be aware of before entering into a debt management plan.  These include:

  • Credit Rating.Your credit rating may still be harmed
  • Lengthy Payment Term. Whilst the arrangement will reduce your monthly repayments to make them affordable, it usually means you will pay the debt over longer period of time.
  • Come creditors may not agree to reduce payments.  Not all creditors will agree to reduce payment terms, and may still try to pressure you to clear your debt quickly.  It’s important to remember to continue paying what you agreed with the debt management company, passing any correspondence over to the debt management company to deal with.