The problems with debt management

The problems with debt management

A debt management plan might be more flexible than other solutions. It’s not legally binding and interest can be frozen. But what are the problems with debt management? Rather speak to someone? Call 0800 077 6180.

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Problems with debt management plans- the term of the plan

When you are considering the various debt solutions it is easy to get caught up in the advantages. If you are facing serious debt it can be very stressful and snatching at a quick solution is understandable. Just as with all solutions, there are problems with debt management plans (DMP’s).

Paying an affordable monthly payment and not having to deal with your creditors is of course very appealing. But debt management is an informal agreement. It does not offer you debt write off and you will have to pay your total debt back in the end.

So if you are paying less each month, then it is going to take you longer to pay the debt back. It is hard to calculate how long it will take as you may still be charged interest on the debts. In some cases this can be many years and often longer than other formal debt solutions such as an IVA or Bankruptcy.

A DMP could be a good temporary fix if things are changing in your life. However, if you are using a DMP to pay back your total debt it will probably take you longer and could cost you more in the long run.

Interest, charges, costs and your credit rating

Unlike a formal debt solution like an IVA, in a DMP interest and charges can still be added to your debts. Many creditors will agree to stopping these costs, but they don’t have to. During the first few months of a DMP your debt will probably go up a bit.

If the amount of your monthly payments is reasonable, creditors may stop charges after a few months of a DMP. This is periodically reviewed by the creditors. They will want to see an updated budget to make sure you are paying as much as you can reasonably afford each month.

In addition if you use a debt management company, some take a fee from your monthly payment for the work they do for you. This will reduce the amount actually paid to your creditors each month and thus increase the time it takes to pay back your debt in full.

All debt solutions have a negative effect on your credit rating. It will start to improve once you have cleared your debt, which with a DMP could take longer. If you are currently up to date with your payments when you start a DMP, your credit rating will then certainly get worse.

Another problems with debt management are around your protection. Even if you are in a DMP, your creditors are still able to take legal action against you if they wish. This is because a DMP is not a formal legally binding agreement. Your creditors could ask the court to issue a County Court Judgement (CCJ) against you.

If a CCJ is granted, creditors can then apply for an Attachment of Earnings which would mean that payments towards your debt would be taken directly from your wages. If you pay regularly into a plan then this is less likely. The CCJ would affect your credit rating for 6 years.

Homeowners will not forced to release any equity from their property to put towards debts in a DMP. However this does not mean your home is protected from your creditors. Creditors could apply for a Charging Order against your home which secures the debt against your property.

DMP’s can work for some people. However they do not provide the same protection as formal solutions such as an IVA. If you already have a poor relationship with your creditors, you need to consider whether an informal solution like a DMP is enough for your needs.

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