A debt management plan is an informal contract between you and your creditors to repay your non-priority debts, paying an amount you can afford each month. Your non-priority debts include the liabilities you have received by applying for financial products such as a personal loan or overdraft and credit card.
How Do You Establish a Debt Management Plan?
You can establish a debt management plan by doing the following:
- First: Determine your monthly priority expenses (utility, housing, income tax payments, and council tax payments).
- Second: Subtract the total from your monthly income
This should provide you with an exact picture of the amount of money you can afford to pay each month towards your outstanding debts. You can create a proposal, containing supporting financial documents, to present to your creditors.
*Note: A debt management plan is not a legally binding agreement. This means that your creditors are not obligated to accept your proposal or accept your terms. However, if you are defaulting on your payments, your creditors may be more likely to accept your debt management plan, as they would rather receive something other than nothing.
The Two Ways to Develop a Debt Management Plan
You can either develop a debt management plan yourself or through a debt management firm. The firm will interact with your creditors. You will need to pay the firm a fee each month, which they will automatically take out of the payments you make to the creditors.
Now, you have to decide if the debt management plan is the right option for you.
Should You Create a Debt Management Plan?
If one or more of the following situations apply to you, you need to establish a debt management plan:
- You lack the confidence to deal with the creditors by yourself or you believe that your creditors are exploiting your circumstances for their benefit
- You are unable to manage making several payments to numerous creditors each month and you would like to simplify the repayment process by paying a single payment each month
- You earn enough money each month to repay your living expenses and priority debts, but you cannot afford to repay your non-priority debts each month
- You believe that your financial difficulty will not last a long time and you would like to create a flexibledebt repayment plan to decrease financial pressure
However, you also should consider the cons of setting up a debt management plan.
The Cons of Creating a Debt Management Plan
The cons of creating a debt management plan include:
- Your creditors may not agree to creating a debt management plan
- You can not including council tax debt
- It may take longer to repay the debt, as you will be making reduced payments each month
- It will affect your credit rating negatively and make it difficult for you to obtain new finance later
- The debt management firm, if you hire one, may charge you high fees, thus increasing the time it would take you to repay the debts
- Your creditors may not agree to your terms and conditions and can choose to cancel the agreement at any time
- Your creditors may refuse to freeze the late interest charges, causing your debt to increase despite you making payments each month
If you feel creating a debt management plan is right for you, you can create one by yourself or through a firm. If you would prefer IVA advice, contact a licensed practitioner.
Uday Tank has been working with writing challenged clients for over four years. His educational background in family science and journalism has given him a broad base from which to approach many topics. He especially enjoys writing content after researching and analyzing different resources whether they are books, articles or online stuff.