With all the talk about ‘tough times ahead’, people all over the UK are keeping a close eye on their own finances. If money’s likely to be tight, it’s all the more important that borrowers make sure they’re handling their debts in the best possible way.
That can mean different things for different people. Some may need to cut back on their spending. Others may need to focus on clearing their debts more rapidly. And some may need to consider a professional debt solution such as a debt management plan.
What does a debt management plan involve?
A debt management plan is an agreement with a borrower’s unsecured lenders – credit card / store card companies, unsecured loan providers, etc.
It involves negotiating with those lenders (either doing so themselves or asking a debt management company to do it for them), asking them to accept lower payments that reflect what the borrower can realistically afford to pay per month once they’ve accounted for vital things like their mortgage payments, utility bills and food. Lenders aren’t obliged to accept a debt management plan, but they’re likely to do so if it looks like the best way for them to recover the money they’re owed – even if it’s more slowly than they originally expected.
They may also agree to freeze – or at least reduce – interest and other charges on those debts while the debt management plan is in progress. If they don’t, however, repaying the debts more slowly will end up costing more, since the interest will have longer to accumulate.
Debt management is only appropriate for people who can’t afford to keep up with the repayments they agreed to when they took on the debt. It’s not simply a way for anyone to reduce their debt repayments – if a borrower can keep up with their payments, their lenders will expect them to.
How could debt management help?
First of all, a debt management plan can help someone repay the money they owe their unsecured lenders. It’ll take them longer, since they’re making smaller payments, but they’ll know those payments have been reduced to a point where they can afford them without taking up money they need for essentials.
Secondly, that means they shouldn’t fall behind on vital things like such as mortgage payments and utility bills. In other words, although a debt management plan doesn’t address those costs directly, it’ll help the borrower avoid running into problems with arrears, threats of repossession, etc.
Third, a debt management plan can provide flexibility. If someone’s circumstances get worse while their debt management plan is in progress, their lenders may agree to a further reduction in their payments until their situation improves. At a time like this, when so many people are worried about the challenges ahead, this is a particularly important point.
However, repaying debts more slowly does mean the borrower isn’t sticking to the agreement they originally signed up to when they took the debt on in the first place. This can affect their credit rating, as their lenders may decide to issue a default notice, which will stay on the individual’s credit report for six years. This will show other potential lenders that the borrower didn’t repay their debts as agreed, and that can make it harder and/or more expensive to borrow more money in that time.
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