How a debt management plan works

How a debt management plan works

How a debt management plan works

A debt management plan can be a helpful debt solution for people who can't afford their debt repayments. It's an informal solution in which you'll repay your debts in smaller amounts, based on what you can afford on a monthly basis. You'll still repay your debts, but it'll be at a pace you can manage.

In this example, we're assuming your debt management plan is arranged through a professional debt management company. It's possible to arrange a debt management plan on your own (by negotiating directly with your lenders), but many people worry about doing this, seeing it as time-consuming and stressful. A debt management company can speak to your lenders on your behalf, and be there to help for the duration of the arrangement.

Debt management plan: step by step

When you first speak to a debt adviser about a debt management plan, they'll take down some details about you and your debts - including how many debts you have, how much you owe overall, and how much you can afford to pay towards those debts every month. From this information, they can help you to work out a repayment plan that your lenders will - hopefully - be able to accept.

This will be calculated on a pro rata basis (i.e. in relation to how much you owe to each lender). So if you owe a total of 10,000, with 40% owed to one lender, 35% to another and 25% to a third lender, you'd usually contribute 40%, 35% and 25% of the available funds to each lender respectively.

Of course, it's not always this simple, and some lenders might ask for different terms before they'll accept the debt management plan. It's up to your debt adviser to speak with your lenders, and they'll keep you informed along the way.

If your debt management plan is accepted, you'll start making monthly payments as agreed. This will continue either until your financial circumstances change (to a point where the repayment programme is no longer a realistic way of repaying what you owe), or until the debts have been fully paid off.

You'll normally have an annual review of your debt management plan to discuss whether the terms are still right for you and your lenders, although you should discuss any significant changes in your circumstances as soon as they happen.

Debt management: things to bear in mind

Bear in mind that repaying a debt more slowly (than you originally agreed to when you borrowed the money) will damage your credit rating for six years and can also end up costing you more - your lenders may agree to freeze/reduce interest, but they're not obliged to do so.

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