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Informal Debt Management

Prior to looking at the worth of Debt Management as a means to fix an individual’s personal debt troubles, it’s worth looking at the way creditors see it. When you look at it, all lenders want is that their monies be paid back in full and on time together with any interest charges that may have built up as well as any penalties that could have been incurred. Put another way, creditors want debtors to pay back their debts as per the terms and conditions of the agreements or contracts under which the funds were loaned or advanced in the beginning. Not a lot to ask, you would think!

However, needless to say, things at times go wrong. When the borrower for any reason is not able to make the repayments as contracted in the beginning, the lender is forced to think about what the next best outcome is that might be attained. Does the borrower have property that could be used to satisfy the obligations? Can family members, a personal friend or any third party assist the debtor to repay the funds entirely or in part? Might the payment conditions and terms be adjusted to enable the borrower to pay back as much as possible of the debt? Might the term of the borrowings be extended so that the borrower can repay the majority of the debt within the extended duration?

Any time you encounter personal financial trouble and are unable to pay your creditors, on the list of alternatives you are likely to become aware of is to enter into a Debt Management Plan. This remedy could be labelled as one of the major three solutions in the UK with regards to the number of borrowers who use it. The other two important remedies that are used by individuals who find that they’re themselves personally insolvent are Individual Voluntary Arrangements and Bankruptcies. A relatively recent although growing option is the Debt Relief Order that was introduced in 2009.

Although no official figures are published it is estimated that there are approximately a million consumers in the UK at present within debt management plans with their lenders. This dwarfs the numbers going into an IVA or going bankrupt. In 2011, most recent 12 months in respect of which numbers have been released, there have been around 42,000 bankruptcy orders, 49,000 IVAs and about 29,000 Debt Relief Orders in England and Wales. The statistics for Northern Ireland are lower in accordance with the lower number of people there but proportionately the statistics and trends are like England and Wales though Debt Relief Orders were just offered there in 2011.

In Scotland legislation is a little different however there are very similar alternatives available. Rather than bankruptcies you have Sequestrations of which there were 6,300 in 2011. There were, also in Scotland, over 8,500 Protected Trust Deeds the solution similar to IVAs. The very similar Debt Relief Order type solution in Scotland is called a LILA Sequestration, the letters LILA standing for Low Income and Low Assets and there were in excess of 4,800 of these.

It’s worthwhile then to consider the Debt Management Plan, given its seeming wide-ranging appeal. A Debt Management Plan can be a self managed one where the person in debt themselves actually reaches a deal with his or her lenders to pay off money owed on a pro rata basis i.e. the sum the borrower repays to any one individual creditor is in the same ratio as the money owed to that creditor is to the entire money owed to all lenders. For example, if you owe £2,000 to the first of your lenders and you owe £20,000 altogether to all your creditors, then on a pro rata basis 10% of what you can afford to pay monthly will go to that first lender.

Most Debt Management Plans however are not self administered but are managed by specialist Debt Management companies that, on behalf of the borrower, negotiate with lenders and administer the debt management plans. The person in debt forwards the cash, i.e. his or her disposable earnings, each month to the Debt Management Company. It then allocates it to the lenders, having retained its agreed fee. Such Debt Management Plan companies in the UK have hundreds and sometimes thousands of customers on their books.

Debt Management Plan companies pick up negative media attention, every now and again. Maybe a primary reason is that the activity is fairly under regulated in that it doesn’t fall under the aegis of the Insolvency Act. Consequently, some service providers have been charged with making untrue and deceptive promises in their advertising, of offering poor help and advice to debtors and in some cases of overcharging their clients with the result that the OFT has lately told a good number of such companies carry out speedy action to fix their procedures and in some cases have blocked some providers from participating in the debt management business completely.

The major drawing card for the general public in Debt Management Plans looks to be it’s a not so formal deal with creditors so that the names of debtors in Debt Management Plans do not appear on the Insolvency Register. Theoretically the credit rating of a person in debt who enters a Debt Management Plan shouldn’t be adversely impacted however in practice, it probably was already impacted prior to when the Debt Management Plan commenced. The important consequence of DMPs is that the term of repayments of debts is frequently greatly lengthened and even though nearly all lenders stop charging interest and penalties for a while at least, it could take a long time, ten years in some cases, until the obligations are repaid. Another significant attraction of a Debt Management Plan is that you don’t need to be insolvent to enter a Debt Management Plan. To go into an Individual Voluntary Arrangement or petition for bankruptcy, you have to be insolvent.

Lenders, generally, prefer Debt Management Plans since there are concrete plans to pay back liabilities in whole and thus they won’t need to make provisions on their balance sheets for ‘bad debts’. Borrowers ought to be cautious in selecting a DMP company to work on their behalf and to select one of the numerous reputable Debt Management Plan firms in the marketplace, whose standards of advertising are professional, whose advice is thorough, transparent and of a superior quality and whose charges are affordable, competitive and explained fully and fairly. Given these reasons, the market demand for Debt Management Plans will most likely stay buoyant.

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