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The Truth About Debt Management Plans

The Truth About Debt Management Plans

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Super worried about how you’re going to free yourself from all those fiscal liabilities you’ve managed to build up over a period of time? Mate, we are referring to that pesky four letter term that is haunting you at night: debt. Do not worry, there are a lot of residents in this great country who are probably up at night for the same reasons as you. The UK Finance’s Household Finance Update calculated that total debt was about forty-four million and eight hundred thousand pounds by the end of December 2018. Whew, doesn’t that number just blow your mind?

Well, the good news is that there are options available to you to help you achieve freedom from all this debt.

Ever heard of a debt management plan? Well, it’s going to be the one of the best things you’ve read about all day as it’s going to help you.

Let’s get started!

What is a debt management plan?

Essentially, a debt management plan is an arrangement between you and your lenders where they agree to accept lower monthly payments from you spread over a longer period of time. Usually, the rate is more economically feasible for you, as the debt-holder. To qualify for this debt relief option, you should owe a minimum of £2000 on unsecured debts to your creditors.

If you are unable to meet your prior debt monthly sums, then a debt management plan will increase your liquidity as you will make lower monthly payments, with the consent of your creditors. In fact, you could even get your interest charges frozen for the time being, so your payments are allocated towards your real debt sum. Of course, this is not always the case and depends on the terms and conditions laid out between you and the economic institutions you owe money too.

How does a debt management plan work?

A debt management plan will be established and executed by a third party service provider. Usually, the actors involved in this plan are either a debt charity organisation or a debt management agency. Prior to initiation of this, your DMP advisor will assess your financial situation, study your inflows versus your outflows and appraise how much you can allocate to pay off your debts on a monthly basis. He will take into account your major monthly bills and daily cost of living expenses. This will be equally divided amidst your lenders. What will happen is that you will transfer the agreed upon monthly debt sum to your debt management plan advisor and he will pass it on the corresponding amounts to your creditors.

What debts can I pay off with my debt management plan?

The drawback is that you can only use this debt relief instrument for non-priority debts. These include but are not limited to:

  • Personal loans
  • Bank loans
  • Money owed to friends or family
  • Overdrafts
  • Home credit, store credit or catalogue
  • Credit card debt

You will not be able to cover the following classes of debt under a debt management scheme:

  • Council tax
  • Gas or electricity bills
  • Court fines
  • Income tax, national insurance
  • Rent, mortgage or other loans taken out against your house
  • Hire purchase agreement
  • Child benefits

What are the benefits of a debt management plan?

 You’ll make lower monthly payments

As stated, the primary advantage of a debt management plan is the reduced sum you will have to dish out every month. As you will have access to more cash for your daily living requirements, you will not need to dive deeper into debt just to make ends meet. After all, it is a never – ending cycle that one can get into when trying to get out of debt and trying to manage one’s normal expenses.

Lenders will stop chasing you

Given that your debt management agreement is implemented between you and your lending financial institutions, they will stop harassing you for payment as they’ll know what amount to expect from you and by when.

You’ll evade formal insolvency

Remember that a debt management solution is not a legally binding agreement. This will save you from being listed on a public insolvency register and prevent you from having to face any sanctions that arise as a result of formal insolvency. Such a situation would impact your employment choices and point you in the direction of bankruptcy. That would also put your own assets at risk.

Might be better for your credit score in the long run

How, you may wonder?

Look, no matter what, your credit score will suffer due to your inability to make monthly payments and that you’ve had to resort to external help to manage your debt. However, after taking up a debt management plan, you’ll be paying less towards your debt on a monthly basis than was initially put on your credit file.

Your move to take up a debt management plan will show your determination to solve your debts without having to resort to formal insolvency, so that will be much better for your credit score in the long-term.

What are the disadvantages of a debt management agreement?

 Your lenders could refuse your terms and conditions

The major flaw with this kind of debt relief is that all your lenders have to agree to the clauses laid out for it to be accepted. With individual voluntary agreements and trust deeds, the majority of creditors accept your repayment plan, all have to accept it. If you want more debt management advice, don’t worry. There is plenty of information available.

Dmps are not legally binding documents

Your creditors can still choose to contact you if they want, even after the implementation of a debt management plan.

Debt management plans take longer to finish

There is no fixed period of time for a debt management plan. It can go up to more than ten years, if need be. Formal, official plans tend to finish in a quicker frame of time. For instance, trust deeds and individual voluntary agreements finish in five years or so.

In the end, only you can decide if a DMP is right for you.

This is a collaborative post.

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