Is Debt Management A Safe Debt Solution?

If you are struggling with your debt and are having problems repaying your debts one of the debt solutions out there is known as a Debt Management Plan. This is one of the three most popular debt solutions in the UK, the other two being Individual Voluntary Arrangements (IVAs) and Bankruptcies. There are around one million people in the UK currently in debt management plans.

Debt Management Plans can be organised by yourself if you can reach an agreement with your creditors to repay your debts on a pro rata basis i.e. the amount you repay to any individual creditor is in the same ration as that debt is to the total debts. If you owe 3,000 to one of your creditors and you owe 30,000 in total to all of your creditors, then 10% of what you can afford to pay each month goes to your first creditor.

Most DMPs however are not self administered but are managed by specialist companies – Debt Management companies who negotiate with creditors on behalf of the debtor and who administer the debt management plans. The debtor forwards the funds each month to the Debt Management Company. It in turn distributes them to the creditors, having retained its agreed fee. Such DMP companies in the UK have hundreds and sometimes thousands of clients on their books.

So why do DMP companies get bad press, from time to time? Perhaps one of the reasons is that the process is somewhat under regulated in that it doesn’t fall under the aegis of the Insolvency Act. As a result, some service providers have been accused of making false and misleading claims in their advertising, of providing poor advice to debtors and even of overcharging their clients with the result that the OFT have recently told a number of such companies to take immediate action to clean up their act.

The main draw of a Debt Management plan is that it is an informal arrangement between you and your creditors. This means the name of the debtor in a Debt Management plan will not appear on the Insolvency Register. Theoretically the credit rating of a debtor who enters a DMP should not be affected by entering the DMP but in reality, it probably was probably already negatively affected before the DMP commenced.

The true effect of DMPs is that the term of repayments of debts is (considerably) extended and while some creditors may stop charging interest and penalties (for some time at least), it may take a long time (ten years in some cases) before the debts are repaid. The other big attraction of a DMP is that you do not have to be insolvent to enter a DMP, unlike an Individual Voluntary Arrangement or Bankruptcy.

Creditors in the most part are in favour of Debt Management Plans since they are definite plans to repay the debts in full. Debtors are advised to be wary when choosing a Debt Management company to act on their behalf. There are many reputable DMP companies, whose standards of advertising are professional, whose advice is thorough, and of a high quality and whose fees are reasonable, competitive and explained to clients fairly, but there is also bad ones so make sure and do your research and choose carefully.

About Paddy Byrne

I work at National Debt Relief; a well established debt help company. I have had various roles throughout the company which has allowed me to enhance and develop my knowledge on Debt Solutions, legislation and other areas of the Financial Industry in both the UK and Ireland. I currently write for the National Debt Relief website, as well as other websites. I have written 100's of articles relating to different topics on debt.
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