Is A Debt Management Plan Right For Me?

A debt management plan can be a very effective means of getting out of debt for many people. By allowing you to repay your debts at a slower pace, it can make your unmanageable debts a lot easier to deal with.

How a debt management plan works

In short, a debt management plan is an agreement between you and your creditors for lower repayments towards your debt, based on how much you can afford.

It's possible to negotiate with your creditors for a debt management plan on your own, but this can be a time-consuming process. For that reason, many people prefer to use a debt management company, who can negotiate with creditors on their behalf.

As well as negotiating for lower monthly payments, it may also be possible to get a reduction or a freeze on interest rates and other charges, which can often enable you to repay your debts more quickly, as well as preventing them from growing.

Some people may feel it is unlikely that their creditors will accept lower payments towards the debts. But if it's clear that you will be unable to repay your debts under the original terms, then most lenders will accept that it is a more realistic way for them to receive all the money they are owed.

Once your debt management plan begins, you will make a single monthly payment to your debt adviser, who will then divide this amongst your creditors in accordance with how much each is owed.

Who is debt management right for?

Typically, a debt management plan is suitable for people with multiple debts who are unable to meet the required monthly payments. However, a debt management plan is not suitable for everyone. You should always speak to a professional debt adviser before making a decision - they may advise you on another debt solution that meets your needs more effectively.

What other debt solutions should I consider?

There are a number of other debt solutions that can help you to avoid court action from your creditors, as well as the prospect of bankruptcy.

Debt consolidation loan

This is, in short, a new loan designed to repay your existing debts, after which you will repay your new creditor in single monthly payments.

Not only can this simplify your finances, it may also be possible to reduce your outgoings by spreading out your repayments. However, a longer repayment period means paying interest for longer, which means you could pay more overall.

That said, you could make a saving on the interest you pay if you are consolidating high-APR debts. As long as the interest rate on your debt consolidation loan is lower than the rates on your original debts, there's a good chance you could save money.

You must be confident that you can afford your new payments before you take out a debt consolidation loan. If you can't, then another debt solution may be more appropriate.

IVA (Individual Voluntary Arrangement)

An IVA is a legally-binding debt solution which allows you to avoid bankruptcy by agreeing to pay off a percentage of your debts at a more manageable pace, after which your remaining debts will be considered settled.

You will initially work with an Insolvency Practitioner to draw up an IVA proposal, which will then be sent to your creditors. Creditors accounting for 75% of your total debts must approve this proposal for the IVA to go ahead.

You will then make regular monthly payments to your Insolvency Practitioner, who will divide the money between your creditors. This normally continues for five years.

Be aware that if you're a homeowner, you may have to release some of the equity in your home in the 54th month of your IVA (half way through the final year). You may also be required to contribute at least half of any additional income during your IVA, including pay increases, overtime pay and bonuses.