Those concerned with debt are well advised to take the time to learn as much as possible about the options available to them. In this section you will be able to find descrptions written by subject experts of the various solutions. As well as describing how they work you will be able to learn about the strengths and possible drawbacks of each option. Which should you choose? That depends on your circumstances and priorities. We trust that this section of Debt Divas will give you the information that you need to make an informed choice.

IVA Trust Deed Debt Management Plan Remortgage & Secured Loan Bankruptcy

A Debt Management Plan (or DMP) is an agreement between a person and the companies that they owe money to. In this agreement the companies accept payments lower than the contractual amounts in return for the person repaying the debt as fast as they possibly can.

Debt Management Plans could be arranged by an individual themselves or by using the services of a Debt Management company.

DMP’s are available to individuals throughout the UK who are able to make payments towards their debts but who cannot afford to make the full contractual repayments. Debt Management Plans are especially suitable for:

• Persons with debt levels below those usually needed to enter an IVA.
• Persons who cannot afford to meet the usual minimum monthly repayment levels in an IVA.
• Persons who can afford to repay their debts quicker than the usual five year IVA schedule.
• Persons who are not insolvent. For example despite significant debts the equity in their home outweighs their debt levels.
• Persons who cannot enter formal insolvency (IVA’s or bankruptcy) for professional reasons.
• Persons who wish to avoid bankruptcy to protect their home.
• Persons who, for moral reasons, decide that they wish to repay their debt at a rate they can afford rather than seeking bankruptcy to discharge the debts.
• Persons who are trying to sell their home to repay debts but who need to put an interim debt management plan in place until the home sells.
• Persons who will seek to remortgage in the future to repay debt but who cannot in the current difficult lending climate.

The starting point in establishing whether a DMP might work is to record the income and necessary expenditure of an individual excluding their unsecured debt commitments. For example mortgage or rent costs, food, transport, clothing and heating etc must be considered as essential expenditure more important than the repayment of the likes of credit cards and unsecured loans. There are ranges of expenditure that creditors understand are essential and a good debt management company can help explain these to you.

By subtracting essential expenditure from income a figure is produced that is sometimes known as “disposable income”. This disposable income figure is the amount that someone could offer to pay towards their debts each month without having to resort to credit to fund their everyday costs. For example a lady who earns, after tax, £1500 per month but who has £1400 of essential expenditure might decide to offer £100 per month in total to those that she owes money.

The £100 monthly payment would be offered to her creditors on a pro rata basis. This means each creditor would receive their fair share of the monthly amount based on the percentage of the debt that was owed to them. In our example we could say that the lady owes a total of £10000. £5000 (or 50%) of this total is owed to ABC Credit Cards. ABC Credit Cards would be offered £50 per month as their fair share of the amount that our fictional debtor can afford to pay.

Creditors are required under the British Banking Association’s Code of Conduct to “treat cases of financial difficulty sympathetically”. For this reason most creditors are very supportive of fair debt management proposals where those who owe them money are genuinely repaying the debt back as quickly as they can afford to. They will judge this effort by reviewing a copy of the income and expenditure report that was earlier used to work out how much could be repaid each month. Provided that the proposal is fair most responsible creditors will accept it.

Most creditors interpret their responsibilities under the BBA’s Code of Conduct a little further and will offer to freeze or significantly reduce the interest that they charge on the debts. This concession is made to reward the genuine efforts of the debtor to repay the money that they owe and to provide a prospect of clearing the debt within a reasonable timeframe.

Where a DMP company (such as Bright Oak) is used it would be normal to make a single monthly payment to them covering the affordable amount. The DMP company would then send the payments to the creditors on your behalf. The DMP company is also responsble for working on the income and expenditure statement with you, writing to the creditors with your proposal, negotiating acceptance of reduced payments and interest freezes/reductions on your behalf and reviewing the arrangement from time to time to ensure it remains fair and viable for debtor and creditors alike.

A Debt Management Plan is a very flexible arrangement that can be adapted to suit changes in an individuals circumstances. Such changes in the future might include promotion, redundancy, marriage, childbirth, ill-health etc. In any of these instances a DMP can immediately be reviewed to reflect the new circumstances. Anyone concerned about the more formal and restrictive elements of IVA’s or bankruptcy might wish to consider debt management instead.

Debt Management is also highly useful for those to need to buy time to stop a situation from getting worse until they can improve their position. In the current financial and property climate this frequently includes people trying to sell (or remortgage) their homes to repay debt. There is also growing trend for those with buy-to-let properties suffering from losses on these investments and seeking an interim measure until such time that they can sell the properties to clear debt or refinance to reduce mortgage costs.

DMP’s can also potentially result in the reduction of the total debt repayable should a lump sum become available in the future. Creditors are often prepared to accept reduced lump-sum payments to fully clear the debt should that become possible in the future. This could be of huge value to those with equity in their homes, those expecting bonuses from work, those who receive lump sums towards the end of their careers and those who might inherit money in the future.

Debt Management Plans do not benefit from the same degree of certainty as some other debt solutions. Most creditors will freeze interest but a few may not in certain circumstances (especially in the early stages). There is no element of debt automatically being written off at the end of a fixed period; the debts will normally be repaid until they are fully cleared. While legal action is rare creditors do retain the right to take legal recovery action should they wish to.

I’d suggest that you compare the benefits and potential drawbacks of debt management according to your own needs, circumstances and attitudes. I’d also compare it against the positives and negatives associated with the other possible debt solutions featured here on Debt Divas. DMP’s are a highly effective solution in the right circumstances as are the other solutions. If you’re confused which way to proceed I’d recommend that you seek good impartial advice.

For further details about debt management plan fees and the work that is conducted Click Here

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