Essential Truths about Debt Management Plans
Anyone who is considering entering a Debt Management Plan should take time to learn about the essential facts of the Debt Management Plan and the way it deals with personal debt problems before taking the plunge.
How long does a Debt Management Plan last?
While a Debt Management Plan can last for a relatively short time i.e. for just a few years, most Debt Management Plans last much longer than that and ten years would not be an unusual duration.
For one in four people entering a Debt Management Plan, the projected life would be in that sort of range. Everything really depends on the debtor’s personal circumstances. However, the Debt Management Company which the debtor engages to manage the plan should be able to estimate the likely length of the arrangement, once it has received all the relevant information regarding the total amount of the debts, the debtor household income and expenditure, details of any assets the debtor may have and the domestic, financial and work circumstances which were the cause of the problem in the first place.
Are unsecured debts frozen once the debtor commences the Debt Management Plan?
In a Debt Management Plan the debtor starts off paying a fixed amount each month and this is distributed on a pro rata basis amongst the unsecured creditors, less whatever the Debt Management Company charges. However none of the unsecured debt is written off by the creditors and so the Debt Management Plan will continue until every creditor is paid off in full or until the debtor decides to exit the Debt Management Plan. Creditors are under no obligation to stop charging the interest and indeed other penalties and charges. The debt is not frozen as it would be for example in an Individual Voluntary Arrangement (IVA). However, in reality many creditors do stop charging interest and penalties once they are convinced that the debtor is in a bone fide Debt Management Plan and is serious about maintaining the monthly payments. The Debt Management Company plays a crucial role in persuading creditors to forego interest and penalties.
The potentially long duration of the Debt Management Plan and the non-freezing of debts are the two main reasons why debtors sometimes shy away from entering into a Debt Management Plan. That is not to say that a Debt Management Plan is not suitable for many people who encounter financial difficulties. It may very well be the best or indeed only long term solution for certain people. Or it may be the best initial solution for a short term problem. For example, it may be that it suits someone to enter a Debt Management Plan for say six months and to then propose an IVA to creditors. However it does appear that about 30% of people who are currently in an IVA or are bankrupt had previously been in a Debt Management Plan. That seems to be a rather high percentage and it suggests that all available options were not fully considered in the first place or that the Debt Management Plan choice may not have been the right decision.
What are the advantages of a Debt Management Plan?
The fact that a Debt Management Plan is an informal and flexible arrangement is likely to suit the debtor’s financial circumstances and needs. The debtor only pays what he or she can afford and payments are tailor made for each debtor. The debtor repays 100% of all unsecured debts in a Debt Management Plan and does not have to be insolvent to enter into a Debt Management Plan, in contrast to an IVA or bankruptcy. The debtor does not have to release equity from property unless he or she wants to do so. Creditors prefer Debt Management to other processes for resolving financial difficulties mainly because there is no debt write off as such and creditors have a good prospect of getting all their money back in contrast to an IVA or bankruptcy where they are unlikely to recover more than perhaps 30% of debts. Publicity is minimal in a Debt Management Plan and the debtor’s family, friends, neighbours and employer are unlikely to find out about it since the details are not put up on the Insolvency Register, unlike the practice in an IVA or bankruptcy.
Are there alternatives to a Debt Management Plan?
There are many alternative courses of action for a debtor who encounters financial difficulty and all options should be considered before deciding which way to go. Some of the most common alternatives are bankruptcy, Individual Voluntary Arrangement, Debt Relief Order, Debt Consolidation, Asset Sale & Debt Settlement and Property Remortgage & Debt Settlement. It may even be that financial assistance is available to the debtor from family or friends. Getting sound advice before proceeding is crucial.