Creating Your Own Debt Management Plan – Does it Work?
A debt management plan may be one option for people having trouble with unmanageable debt. By reducing your monthly outgoings to a level you can manage, a debt management plan could help to ensure that both your debt repayments and your other financial commitments are met each month.
It’s possible to arrange a debt management plan on your own, or through a professional debt management company.
*How does a debt management plan work?*
A debt management plan is an informal agreement with your lenders – you’d ask them to accept lower monthly payments towards your debts, based on how much you can afford once your essential costs (e.g. mortgage/rent, utility bills and food) have been accounted for.
Because you’d be repaying your debts more slowly, you may end up taking longer to repay the full debt. This may also mean you’ll pay more interest, and therefore more in the long run – but many people see this as less important than being able to cope with their outgoings on a monthly basis.
Plus, it may also be possible to negotiate a reduction or freeze in interest and other charges, which can prevent your debt from getting any bigger.
*Debt management plan – go it alone or go professional?*
It is quite possible to arrange a debt management plan alone. To do this, you will need to calculate how much you can afford to pay towards your debts each month once your essential costs have been covered, and divide this amount between your lenders on a pro rata basis (according to how much you owe to each lender as a percentage).
You will then need to speak with your lenders directly and tell them how much you can afford to pay them each month. If they accept, you’ll have to stay on top of your finances, informing each of your lenders when something about your financial situation changes, reacting to any requests they make, and negotiating subsequent agreements if and when they become necessary.
Alternatively, you can arrange your plan through a professional debt management organisation, which can negotiate with your lenders on your behalf. They can also help you do the calculations for how much you should pay to each of your lenders, and may (depending on which organisation you’re dealing with) act as a point of contact between you and your lenders for the duration of the debt management plan, handling all correspondence, distribution of funds and so on. This can save you a lot of time and effort, although there may be a fee for the debt management company’s services.
*Is debt management right for me?*
A debt management plan may be suitable for people who cannot afford their debt repayments now, but would be able to afford to repay the full debt by making smaller payments.
Finally, please note that ‘defaulting on’ the original repayment agreements for any debt can damage your credit rating, making it harder and/or more expensive to access further credit for the six years it stays on your credit report. However, most people seriously considering a debt management plan would be facing this prospect anyway, as debt management is only an option for people who can’t afford to keep up with their repayments.
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