How Does a Debt Management Plan Score as a Debt Strategy?

Written By Arman Zulhajar on Wednesday, May 2, 2012 | 12:42 AM

By Blanca Flowers

Before going through the merits of Debt Management as a method for fixing an individual's personal debt issues, it is worth looking at the way in which creditors view it. If you mull it over, all lenders really want is that their funds be paid back fully and on time as well as any interest charges that may have built up as well as any penalties that may have been incurred. Basically, creditors want borrowers to repay their outstanding debts in line with the terms and conditions of the agreements or contracts under which the monies were lent or advanced to start with. Not a lot to expect, you would think!

However, needless to say, things at times don't work out. When the borrower for whatever reason is not able to make the repayments as agreed initially, the lender is forced to think about what the next most appropriate outcome is that could be brought about. Would the person own assets which might be used to repay the obligations? Could family members, a personal friend or any third party assist the borrower to pay back the funds entirely or in part? Can the payment conditions and terms be adjusted to enable the borrower to pay back as much as possible of the debt? Might the term of the borrowings be prolonged so the debtor will be able to repay most of the obligations during the lengthened duration?

Any time you encounter financial troubles and are not able to pay back your creditors, amongst the choices you might come across is to enter into a Debt Management Plan. This solution could be called one of the big three options in the UK with regards to the many debtors who avail of it. The other two important options that are utilized by individuals who realise that they are themselves personally insolvent are Individual Voluntary Arrangements and Bankruptcies. A comparatively recent although growing choice is the Debt Relief Order (DRO) that was introduced in 2009. Although no official statistics are published it is estimated that there are nearly one million individuals in the UK now in debt management plans with their lenders. This dwarfs the numbers entering an IVA or going bankrupt. In 2011, most recent 12 months in respect of which numbers are available, there were nearly 42,000 bankruptcy orders, 49,000 IVAs and around 29,000 DROs in England and Wales. The statistics for Northern Ireland are smaller in accordance with the smaller population there but proportionately the numbers and trends are like England and Wales although DROs were only launched there during 2011.

In Scotland the law is to some extent different but there are comparable alternatives to be had. In place of bankruptcies you have Sequestrations of which there were 6,300 in 2011. There were, also in Scotland, over 8,500 Protected Trust Deeds the solution similar to IVAs. The comparable DRO type alternative in Scotland is called a LILA Sequestration, the letters LILA meaning Low Income and Low Assets and there were over 4,800 of these.

It is worth it then to check out the Debt Management Plan in the context of its apparent wide-ranging popularity. A Debt Management Plan can be a self managed one where the person in debt themselves arrives at a deal with their creditors to pay back debts on a pro rata basis i.e. the sum the debtor repays to any particular individual lender is in the same ratio as the money owed to that lender is to the total money owed to all creditors. By way of example, if you owe 2,000 to the first of your lenders and you owe 20,000 altogether to all your lenders, then on a pro rata basis 10% of what you can afford to pay each month will go to that first lender.

Most Debt Management Plans however are not self administered but are managed by professional Debt Management companies that, on behalf of the borrower, negotiate with creditors and administer the debt management plans. The debtor forwards the funds, i.e. his or her disposable earnings, each month to the Debt Management Company. It in turn allocates it to the creditors, having retained its agreed upon fee. Such Debt Management Plan firms in the UK have hundreds and sometimes thousands of customers on their books.

Debt Management Plan firms pick up unfavorable media attention, every now and again. Certainly a primary reason is that the activity is fairly under regulated because it doesn't fall under the aegis of the Insolvency Act. For that reason, a few firms were accused of making incorrect and deceptive claims in their advertising, of giving poor advice to debtors and even of overcharging their customers with the result that the OFT has not too long ago ordered a good number of such firms to take immediate steps repair their operations and actually have stopped some organizations from participating in the debt management business entirely.

The major appeal for the public in Debt Management Plans seems to be it's an informal deal with creditors so that the names of debtors in Debt Management Plans don't show up on the Insolvency Register. In theory the credit rating of a borrower who enters a Debt Management Plan ought not to be detrimentally influenced however in reality, in all probability it was already affected prior to when the Debt Management Plan began. The real impact of Debt Management Plans is that the duration of repayments of obligations is usually considerably lengthened and although almost all creditors stop charging interest and penalties for a while at the very least, it might take a long time, ten years in some cases, until the obligations are repaid. Another significant appeal of a Debt Management Plan is that you do not need to be insolvent to enter a Debt Management Plan. To enter an Individual Voluntary Arrangement or petition for bankruptcy, you've got to be insolvent.

Creditors, in general, like Debt Management Plans since there are concrete plans to pay back debts entirely and thus they do not have to make provisions on their balance sheets for 'bad debts'. Borrowers ought to be careful when choosing a Debt Management Plan firm to act on their behalf and to choose one of the many reputable Debt Management Plan companies in the marketplace, whose standards of advertising and marketing are professional, whose advice is comprehensive, clear and of a high quality and whose charges are realistic, competitive and spelled out fully and fairly. Due to these factors, the demand for Debt Management Plans is likely to keep on being buoyant.

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