Debt Management as a Stepping Stone to Debt Freedom
Make no mistake about it. Being in a Debt Management Plan is no cakewalk. There are some distinct benefits but there are also some downsides. However, because a Debt Management Plan is quite informal and flexible, you can pull out of it at any time if a better solution to your debt problems presents itself. Entering a Debt Management Plan is a bit like dipping your toe in the waters of insolvency solutions without totally committing yourself to sticking to a rigid financial path.
Going into a Debt Management Plan can reduce the personal stress of unmanageable debt primarily because the payments on your unsecured debts are reduced to a single monthly affordable payment while your priority payments such as your mortgage or rent are paid in full. If you need to reduce your monthly payment in any given month you can do this but repeated transgressions like this are likely to annoy your creditors and cause them to take sterner action with you. By and large nobody will find out about your Debt Management Plan unless you want them to except of course your creditors who must be made aware of it. The privacy and confidentiality of a Debt Management Plan makes it attractive to many people. If you own property such as a house, you will normally not be forced to release any equity there might be to pay off your debts. You may choose to do this but creditors will normally not force you to do so if you keep to the terms of your Debt Management Plan.
The biggest downside to a Debt Management Plan for most people is the length of time it may take to repay all of your debts and that is what a Debt Management Plan commits you to do. You benefit by paying less each month than what you were supposed to pay when you borrowed the money in the first place but because you must repay everything, the repayment term can be very long. It could take ten or more years to clear your debts.
The other big negative effect of entering a Debt Management Plan is that your credit rating will take a big hit as soon as the Debt Management Plan commences. What’s more, your credit rating will stay poor until the Debt Management Plan is complete and all your debts have been repaid in full. While you may succeed in getting your creditors to stop applying interest and penalty charges to your accounts while you are in a Debt Management Plan, there is no guarantee that all of your creditors will agree to this. Because the Debt Management Plan is an informal process, any creditor can continue to apply interest and charges or resume doing so after allowing you an interest free period at the beginning of the Debt Management Plan. At the same time, many of the companies that act as Debt Management providers claim to have a high success rate in persuading creditors to forego interest and penalties for their Debt Management Plan clients. Finally a Debt Management Plan does not give the debtor any legal protection from creditors who may decide at any time to seek a county court judgment or to apply for a charging order against the debtor’s property.
Being in a Debt Management Plan can provide you with a breathing space to consider an alternative solution such as an Individual Voluntary Arrangement (IVA). If you are not insolvent the question does not arise, since under the 1986 Insolvency Act you have to be insolvent before you can enter an IVA. Many people who are currently in Debt Management Plans are not insolvent, in spite of the financial difficulties they may be encountering. The second barrier to entering an IVA is that while this financial solution is available in England, Wales and Northern Ireland, it is not available in Scotland or the Republic of Ireland. In Scotland the financial solution which is broadly equivalent to an IVA is a Trust Deed. For the Republic of Ireland there is no financial solution remotely like an IVA although legislation to introduce such a solution there has been discussed there for many years now. Under European Regulations, it is possible to enter an IVA provided that you live in a member state of the European Union as long as your ‘Centre of Main Interests’ or COMI is in England, Wales or Northern Ireland.
It is unofficially estimated that there are about one million people in the UK currently in Debt Management Plans. A few of these Debt Management Plans are self administered where the debtor reaches informal agreements with creditors to make reduced payments on unsecured debts. However, most Debt Management Plans are administered by Debt Management Plan providers who specialize in debt management. If you want to check out the full range of personal insolvency solutions, then you should contact a reputable provider of insolvency services who can establish fairly quickly whether you are insolvent or not and will not normally charge you any fee for an initial consultation. If you are insolvent, then you should consider the full range of financial solutions. You could for example, petition for bankruptcy or enter an IVA or seek a Debt Relief Order. A Debt Relief Order is limited to debtors with disposable income of less than £50 per month, debts of less than £15,000 and no assets. If you confirm that you are not insolvent, it may be that you might better be able to address your financial problems by for example, re-mortgaging your property and using the released equity to clear your debts or reduce them to manageable levels. If you are already in a Debt Management Plan, your current Debt Management Plan provider may well have the expertise in house to review your circumstances and advise you appropriately. In any case, you may want a second opinion before you decide to continue in your current Debt Management Plan or to try an alternative solution.