What’s the point of a debt management plan?
by admin on 10/05/10 at 6:56 am
What’s the point of a debt management plan? If you can’t keep up with the unsecured debt repayments you originally agreed to, it’s best to pay as much as you can afford – even if you’re still in the process of negotiating with your lenders, and even if they’ve already turned down your offer of lower payments.
This shows them that you’re serious about doing what you can to repay the debt – and if you ever end up in court because of your unsecured debts, the court will be able to see this too.
Click here to read more about debt management.
Of course, it’s better if you can get your lenders to agree to those payments, and this is where a debt management plan can help. It works like this: if you can’t afford your monthly payments, you ask your lenders to accept lower payments that represent the maximum you can genuinely afford. (Many people choose to work with a debt management company, rather than doing it all on their own.)
These payments would be based on what’s called your disposable income: the portion of your income that’s left after you’ve set aside enough money to pay for your essential expenses (rent or mortgage payments, utility bills, essential food / transport / clothing costs, etc.).
If you didn’t have any debt at all, your disposable income would be just that – disposable. You wouldn’t actually need it on a monthly basis, but would be free to save it or spend it on luxuries / non-essentials.
Since you have debts, your disposable income will also need to cover your payments to all your non-priority debts (credit cards, store cards, overdrafts, unsecured loans, etc.). If your disposable income is enough to do that, then a debt management plan isn’t right for you – your lenders won’t accept smaller payments unless they can see that you can’t afford the payments you originally agreed to make.
If your disposable income isn’t big enough to cover the payments to all your non-priority debts, then debt management might be a good idea. As mentioned above, it would show your creditors that you’re paying as much as you can. Making payments which you can afford would let you pay off your unsecured debts at a realistic rate, without taking up the money you really need for things like your rent/mortgage payments.
If you’ve asked a debt management company for help, there can be other benefits too. The debt management company may handle paperwork, phonecalls and distribution of funds as well as the initial negotiations with your lenders – and be there to help you with any issues that come up while your debt management plan is running. If your income drops, for example, they may be able to negotiate a further reduction in your payments to make sure they remain in line with your financial situation. Note that you may pay a fee for their assistance.
And please note that a debt management plan isn’t an easy option. It comes with drawbacks as well as benefits, and will require you to pay as much as you can realistically afford.
Repaying any debt more slowly than you originally agreed to – whether you join a debt management plan or not – isn’t something you should do unless it’s necessary (and, as mentioned above, your lenders wouldn’t accept lower payments unless they thought this was the best way of you repaying what you owe them).
First of all, repaying a debt more slowly can make it more expensive to repay that debt – your lenders might agree to freeze interest, but if they don’t, your debt will have longer to accrue interest so it can end up costing you more.
Secondly, it can show up on your credit report, showing that you’ve not stuck to your repayment agreement, and this can make it more difficult / expensive to obtain further credit until it disappears from your credit report.
