What is a Debt Management Plan?
Assessing Debt Situations, Interest Charges and Consolidating Loans
Jun 16, 2009
When personal debts have mounted up and spiraled out of control, help may be at hand to sort out the situation by using a debt management company.
The easy access to credit in recent times has meant that some individuals have run up huge amounts of debt perhaps by using several different credit cards. In a worst case scenario, the payments that need to be made each month may even exceed a person's income.
How do Debt Management Plans Work?
A Debt Management Plan is typically an arrangement that is managed with a person's creditors through a third party. After careful assessment of the individual debt situation, income and budget, a plan will be drawn up which is in the best interest of all parties concerned.
Priority expenses will be taken into account such as mortgage payment or rent, food and utility payments such as gas or electricity. Whatever money is left will be used to consolidate credit card debt or other debts and arrangements will be made to pay a certain amount off each month.
An advantage to the debtor is knowing that there is only one loan to pay off and one company to deal with, eliminating the headache of dealing with several different creditors each month.
What do Debt Management Companies Charge?
The debt management company will usually charge an administration fee and then charge a percentage of the monthly amount paid. These fees go towards employing staff dedicated to negotiating better interest rates or even stopping interest or other charges being added to the person's debts. Also, Debt Management Companies usually offer ongoing support to the debtor.
Accepting the terms of a debt management proposal on behalf of the debtor is always up to the creditors to accept or reject but usually they are happy to comply.
What Debts Can be Included in a Debt Management Plan?
People that use a debt management plan to reduce and eliminate their debt will usually only have unsecured debts such as personal loans, credit cards, store cards and bank overdrafts included in their debt management plan. Debts such as car repayments and mortgages are secured debts and are not subject to monthly payment reductions.
Which Debt Management Companies are Best?
Avoid unknown debt management companies and stick with companies that are large and reputable, even if the lesser known companies seem to offer a better deal.
Lots of people that have problems with their debt situation and are desperate to get rid of their debt can be seen as vulnerable toward people looking to take advantage of their situations. A larger or well-known company with comprehensive financial regulations interested in protecting its reputation are the safer option.
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