It’s funny how things come around and go around. 4-5 years ago, Debt Management Plans were a dirty word and it was difficult to get creditors to agree to them. Now, it seems that if you find yourself in financial difficulty, your creditors are positively falling over themselves to get you to enter into this type of plan. But what are the benefits to the individual debtor?
Compared to an IVA, a Debt Management Plan is relatively easy to put in place. Basically you work out what you can afford to pay each month to all of your creditors and then divide this equally between them on a pro rata basis. These reduced amounts are then offered to the creditors. Once accepted as reasonable, this situation gives immediate relief from your creditors as suddenly you are making regular monthly payments to them based on what you can afford – no more robbing Peter to pay Paul.
If you are a home owner, a Debt Management Plan will normally not force you to consider releasing any equity from your house. In addition, the agreement is informal. As such, it is not a legal requirement to include all of your creditors. As such, you could undertake a Debt Management Plan with most of your creditors but leave perhaps a credit card out and continue using that as normal (although this practise is not recommended).
There are of course some downsides to the Debt Management Plan which should be considered. Firstly, with a DMP, you may be repaying what you owe at an easier and reduced rate. However, you still have to pay everything back. Normally this will take a considerable time – 8-10 years on average. It’s a long time to be living within a tight budget will little light at the end of the tunnel.
Secondly, creditors who agree to a DMP are under no legal obligation to freeze their interest and charges. They may agree to do so for a certain time or may use the threat of continuing to add interest if you do not agree to paying them more each month than you can reasonable afford.
Thirdly, because the Debt Management Plan is not legally binding, creditors can demand increases in monthly payments at any time. If one of your creditors suddenly decides that your reduced monthly payment is no longer acceptable they can demand that you pay more. This means that DMPs are uncertain and you never know quite where you stand.
In summary, a Debt Management Plan can be an excellent tool for resolving a debt problem. However, there are some significant pitfalls and disadvantages which you should also be fully aware of.
About The Author -
Steve Jackson, Author for BeatMyDebt. For more information related to Debt Management Plan visit http://www.beatmydebt.com
