If your debt problems have become so bad that you just can’t afford your repayments, you’re not alone. Many thousands of people face this situation every year – but there is help available.
There are various solutions available to people with debt problems, each designed to help with different circumstances. If you can’t afford your existing repayments but can still commit to regular (reduced) payments, one option could be a debt management plan.
What is a debt management plan?
A debt management plan works by reducing the amount you pay towards your unsecured debts to a manageable level. Your new payments will be based on what you can afford after you’ve covered your other essential living costs.
Interest and other charges may also be frozen – depending on what your lenders will agree – which can stop your debts from growing, thereby reducing the amount of time the debt management plan takes to complete.
A downside of this is that making smaller payments means your credit rating will be affected. Defaulting on your original repayment agreements will be recorded on your credit history, potentially making borrowing further money more difficult until the records have disappeared (after six years). And if interest and charges aren’t frozen, the longer repayment period could cost you more in the long run.
How to arrange a debt management plan, step by step
Lenders are legally obliged to accept any payments you make towards your debts, but they can still take action if you’re not keeping up with your original arrangements. As such, it’s important to agree everything with your lenders in advance, rather than just making smaller payments without first talking to them.
With that in mind, we’ve put together this step-by-step guide to arranging a debt management plan in a way that can help you ensure the needs of both you and your lenders are met.
Note: this example assumes you are arranging your debt management plan with the help of a professional debt management company.
1. Get expert advice
A debt adviser will talk you through your circumstances and discuss the various options available to you. If they feel a debt management plan is an option, they’ll tell you exactly what’s involved and (if you think it’s the best approach) help get you started.
2. Work out your budget
Working out your budget for repaying your debts is fairly simple. Start by adding up your essential monthly outgoings (not including the cost of your unsecured debts): things like mortgage/rent payments, food and bills. Now subtract the total from your monthly earnings.
What’s left is money available to pay towards your unsecured debts. On a debt management plan, your lenders will expect you to contribute more or less all of this towards your debts every month.
Normally, this will be split between your lenders on a pro rata basis. This means each lender will receive a proportionate amount of your available income, based on how much of your overall debt they are owed. So if 50% of your debt is owed to lender A, 30% is with lender B and 20% is with lender C, you would offer to pay the same percentages of your available income to each lender.
Note: this doesn’t take into account monthly fees charged by some debt management companies, which would also come out of your available income. Your debt adviser will talk you through any associated fees before your debt management plan is agreed.
3. Negotiations with lenders
Once you and your debt adviser have worked out how much you can afford to pay to your lenders each month, they will start negotiating with your lenders. If all your lenders agree, then great – your debt management plan can start.
Of course, it’s not always this simple. Sometimes lenders may feel you can afford higher payments, in which case you would have to see if your finances can stretch any further. There are no guarantees that you’ll be able to come to an agreement, but your debt adviser will do their best to find a compromise that everyone can accept.
4.Your debt management plan begins
If your lenders agree to it, your debt management plan can begin. Normally a debt management plan will last until you can afford to start making your original repayments again (or if that never happens, until the debts have been cleared).