Debt management plans – can someone please explain?
I’ve been hearing a lot of about debt management plans lately and how they are touted as a cure for the ills of people in debt. Taken at face value the debt management services on offer sound great – take all your loans, credit cards, overdrafts and store cards and turn them into one easy to afford single monthly payment. Wow this sounds great – that is until you dig a little deeper.
How it works
You as a potential customer contact a debt management company. The debt management company will ask you for information in relation to your debt, your monthly income and your day to day expenses. The debt management company will devise a plan for you based on your monthly income and on the amount of unsecured debt that you have. Please note that the debt management company can only devise a debt management plan for you in relation to your unsecured debt, this includes credit cards, overdrafts, store cards and personal loans. Mortgages and car loans will not be covered by the debt management plan. Straightaway this is what I would regard as a negative since you will still have the monthly car loan and mortgage payments on top of the debt management plan payment.
Ok so the debt management company has the necessary information about your debts and your income. The debt management company calculates and agrees a realistic monthly payment that you can make to pay off your debts while at the same time allowing you enough money to pay for your day to day expenses.
When the debt management plans starts the debt management company takes the monthly payment that you give them and distributes it to your creditors as agreed with them under the new repayment terms.
What’s in it for the debt management company?
Funny you should ask that. Why a nice juicy fee of course. Depending on the organization the fee will vary from being a one off admin fee to a recurring percentage based fee.
What’s in it for the creditors?
For the creditors it is a case of something is better than nothing. If you default on all your debts then the creditor will eventually have to write off your debts as a bad debt and they will not get any more money out of you. If the creditor agrees to your debt management plan they know that you will be in a better position to repay your debts and the creditor will get some if not all their money back.
Advantages and disadvantages of a debt management plan
Advantages:
1. Only one monthly payment
2. The debt management company may be able to negotiate lower interest payments and lower monthly repayments for you.
3. You no longer have to communicate with your creditors as your debt management company deals with them on your behalf.
4. You can avoid getting a loan to consolidate your debts as a debt management plan does not involve consolidating your debts.
Disadvantages:
1. Creditors may not necessarily agree to participate in your debt management plan.
2. Your credit history may be affected. It’s not so much the debt management plan that will affect your credti history rather it’s the fact that you were unable to keep the original payment schedule as agreed in the original contract.
3. If you have less than $10,000 in unsecured debt you may not qualify.
4. It will take longer for you to repay debts as the debt management company will most likely try to negotiate lower monthly repayment amounts.
It is up to you to decide if the advantages outweigh the disadvantages. It will depend entirely on your personal situation.
Do it yourself debt management program
The one point I will make is that if you are thinking about using the services of a debt management company why not try to create your own debt management plan first? There is nothing from stopping you dealing directly with your creditors and trying to renegotiate your debts with them yourself. Use the information on this website and on the internet to empower you to take control of your debt.
One of the fundamental problems with the services offered by a debt management company is that they do not offer services that cover secured debt. This means that you will have to deal with your car loan and mortgage yourself anyway so why not simply apply what you learn to all your debts? In the long run it will serve you better to create your own debt management plan and deal with your creditors yourself. You will gain incredibly useful skills and knowledge that will serve you a lifetime. Not only that but it is you who is in full control of the situation. You will be empowered.
However if the thought of creating and running your own debt management plan intimidates you and you are more interested in using the services of a debt management company then please do your research carefully. Do not sign up to any debt management service until you have read the following information about debt management services from the government contained in this link. Debt Management Plans
Posted in Intro to Debt Management
April 28th, 2008 at 7:12 pm
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