Debt Management Plan – How does this work?

Debt Management Plan How does this work?

A debt management plan is an option to consider for somebody who has built up debts and is now struggling to afford the contractual monthly payments to their creditors. In most situations, creditors are happy to accept a reduced payment because that is better than receiving no payment at all.

The first step to take when a person is considering debt management will be to put together a detailed financial statement to show creditors the extent of the person's affordability. This involves detailing all household income such as wages, benefits and pensions (etc) on a monthly basis. This will be compared to the person's monthly outgoings such as mortgage, rent and bill payments (which are known as priority debts') and also food, travel expenses, insurances, clothes and toiletries. The monthly outgoings are deducted from the monthly income to give a person's disposable monthly income (DMI). This information will need to be provided to creditors along with a reason for why the person is suffering financial hardship.

Normally, the creditors will expect the debtor to offer their full disposable monthly income as a monthly payment to be paid to creditors and this will be the starting point of thedebt management plan. Once the DMI is calculated, creditors will need to see what other borrowings the client has so that their percentage share can be worked out. This will be detailed on their debt schedule' and must include all unsecured debts to all creditors so that all can be treated fairly.

For example, if a client has an income of 1,000 and outgoings of 900 per month, then the MDI would be 100. If the client has 5 creditors, and owes each of them an equal amount, then the creditors will expect to receive 20% of the clients DMI each. The actual term of theplan will usually be until all debts are completely satisfied.

In the main, a person has 3 options in regards to getting the debt management arrangement set up. Firstly, there's the DIY method whereby the debtor can do all of the above work himself. The 2nd option the debtor has is to let a commercial debt help company handle the whole process on their behalf. Due to the clout and experience that a professional debt management company has, the arrangement should be set up without too much fuss, although the client will have to pay a fee for the convenience. Thirdly, a debtor can contact a charity or fee-free company such as the Citizens Advice Bureau. These will be able to do much of the work that a private debt management company can, although due to the high level of indebted persons at the moment, waiting times to be seen by an adviser in the free advice sector can vary dramatically. Depending on post code, waiting times can be anything between a couple of days up to a couple of weeks and in some instances it could take even longer.

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