A Quick Guide to Debt Management

Debt management can allow some borrowers to bring their expenditure and income back into line without taking on more borrowing. However, there are pitfalls to be aware of, and debt management is not right for everyone. The moneysupermarket.com debt management guide explains how debt management works and whom it is right for.

What is debt management?

A finance company or lender owed money can appeal to the county court to reclaim their money. However, if the borrower is in genuine difficulty the court can order repayments based on their ability to pay. This will list your debts in priority order, such as where failure to make payments would lead to the loss of your home (mortgage), an essential utility (electricity, water, etc), an essential item (such as a car you need to get to and from work) or could lead to imprisonment. The court will also take into account reasonable amounts for "essentials" for the borrower and his/her family. After all of these are taken into account, the court makes a repayment order based on the monies owed. The court will also freeze interest so that the money you owe does not increase.

Can a debt management plan only be set up by the county court?

You can set up your own debt management plan and there is advice available from the likes of the Citizen's Advice Bureau and National Debtline. However, banks and card companies tend to look more favourably on applications made on your behalf by debt advice agencies.

What are debt advice agencies?

Though the charitable debt advice agencies, such as the Citizen's Advice Bureau and National Debtline, are the most well known, several fee-charging agencies have emerged. They work in a similar manner but will also administer your reduced payments - you pay the money to them and they pass it on.

Are they expensive?

Debt advice agencies typically charge around 15% of your regular payment as their fee and there are also administration costs that could cost you all of your first payment.

Are they worth the expense?

That is down to the individual as to whether you deem the service worthwhile and whether you trust yourself to make the payments without their assistance. Making payments to an agency means it will take longer to repay your debt, so you should avoid using a debt management company unless you feel it is worthwhile. The main advantage is that you don't have to deal with creditors. Remember though that charitable organisations can deal with creditors on your behalf or alternatively supply a self-help pack.

Is there anything to watch out for?

Note that even if you organise a debt repayment programme, your credit reference file will still show details of the debt management plan, which could affect your ability to gain credit in the future. Remember that there is no guarantee your creditors will accept reduced repayments or freeze interest payments.

So who are they right for?

If your problem is temporary and your situation is likely to improve then a debt management plan could be the best solution. However, avoid them if your ability to pay debts will not improve in the next 12 months and/or if your debt will grow as a result of paying a commercial debt advice agency.

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