It’s an interesting question and one that may be difficult to answer when you read the sales pitch about how good debt management plans are but it’s one that I can easily answer through experience. A debt management plan is really designed to help people with a short term money problem who are having some difficulty making their normal monthly debt payments.
Overall you don’t actually save any money and in many instances you will actually end up paying more than you owed before the debt management plan was put in place. So the basic idea is that you agree a reduced monthly payment with your creditors but pay your debt back over a longer period of time. There will be interest charges to take account of and because the scheme has to be administered through an official administrator they also charge a fee every month for their services.
The official administrator
The official administrator is quite an important person in this whole process as it is he or she who makes the payment proposal to your creditors and negotiates it on your behalf. They also take the responsibility of dealing with your creditors on an ongoing basis. Once the arrangement is agreed you actually make a single monthly payment to the official administrator who then distributes the appropriate amounts to your creditors. Unfortunately he or she will also take their fee on top but I suppose it’s all part of the game.
The concept itself makes sense as it can help you realign your debt payments at a time when you’re struggling and need the help. It does give you some breathing space and the time to work towards getting your finances back on track. It also helps with the household budgeting as you only have one payment to worry about and if properly set up in the first place it should be a payment you can afford.
There are some downsides to a debt management plan, one of which is that as with most debt solutions it will affect your credit score. But it’s not such a drastic measure as an IVA or even bankruptcy. The big thing however that I really don’t like about this type of debt solution is that it is an informal arrangement between you and your creditors and there is no legally binding contract that everyone must abide by. This means that if they change their mind or just decide that they want to then any one of your creditors can negate the agreement and decide to come after you again for the money you owe and even take legal action against you. This is not a particularly comfortable feeling and not a situation you would choose if you had the choice. My advice is to have a good debt advisor that you can call if for any reason you have a problem or things don’t quite work out as you expect.
However it is important to point out that many debt management plans run their course as agreed and at the end of the term the debt is paid off. So in practical terms it is an arrangement that can suit both the debtor and the creditor and once agreed should really be a solution that delivers in particular circumstances.