Debt Management

With the most expensive time of year upon us, household credit commitments come under increasing pressure. At this time of year many people turn to third party companies to help manage their debts. These companies are widely called Debt Management Companies or DMP’s.

Debt Management companies have had their fair share of controversy and bad publicity in 2013. In January 2013 the office of Fair Trading refused to renew the license of two existing debt management companies and refused a new application from a third. Each license was not renewed due to unfair or improper business practices. This year two debt management companies have been reported to the police. Smooth Finance, based in Sale went bust in July and was reported to the police, following a £850,000 hole in the company’s accounts.  In March 2013 Debt Help Direct ceased trading as it faced a criminal investigation by Cheshire Constabulary.

So what is a Debt management Plan? In essence the debt management company will take control of your outstanding debts and pay your creditors on your behalf for a fee; it is often called an informal arrangement. The debt management company will liaise directly with the client’s creditors and often ask for a reduced fee and for interested to be frozen, they will also request for all contact to go through them, often giving the client some respite from letters and phone calls.

A debt management plan should only be considered in extreme circumstances where the individual has high outstanding debts across multiple creditors. In all circumstances every effort should be made to deal with your creditors directly and come to some kind of payment plan, as often lenders and credit companies are willing to make allowances for people struggling to pay.

Before entering into a Debt Management Plan, the following things should be considered. Under no circumstances should the client pay any upfront fees, prior to the plan being set up. In most instances a debt management plan will impair the client’s credit file and make it more difficult to borrow money in the future. As not all of the debt is being paid, the loans and credit cards within the plan will typically be defaulted by the lenders, which will be placed on the individuals credit file. There are no guarantees that the debt management company will be able to freeze interest on your accounts, despite this being a leading message in most DMP companies advertising. Each lender will have its own policy and will not necessarily freeze interest before defaulting the account.

Lastly and most importantly the client needs to be aware that the debt management companies will charge for its service, as such not all of the monthly payment will be going towards it outstanding credit balances. In most cases a debt management companies fee will be between 17-20%, again this is the main reason why an individual must speak to their creditors first, as any direct payments should reduce the outstanding balance.

Often a debt management plan becomes an option when a client is declined for a finance application, however there are now more options in the lending market then there has been for some time. There are now a number of new unsecured lenders, who will accept bad credit, and there is an increasing number of companies that offer guarantor loans.  

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