Debt management Plans, are they worth paying for?
A lot of effort gets invested into advertising debt management programs, they are on TV, in news papers and online, but if you're someone struggling with debt, would it be worth paying for such a service or would it be an unnecessary expense?
To get an answer, it helps to understand what they can and cannot do, consider the effects and also look at alternative
methods of dealing with debt.
What they promise
Debt management companies promise to help you get a handle on your debts; they work with you to come up with a debt management plan,
in which you consolidate all your existing debts into one smaller, therefore more manageable monthly payment.
Essentially this would work by extending the period over which you repay your debt (e.g. from 5 to 8 years).
Should your circumstances change, the plan allows you to adjust how much you're paying.
They also promise to negotiate with your creditors in an effort to get interest charges on the debt frozen or reduced;
this might work if they manage to convince the creditors that they're at risk of losing all of their money if adjustments are not made.
It doesn't always work though.
Disadvantages
Cost
A debt management company can charge between 15 and 18% of the monthly payments you make, and possibly other charges such as
administration fees.
The effect is less of your money is going to your creditors, which means your debts will take longer to clear.
Effect on your credit history
Going on a debt management plan negatively affects your credit record, making it very difficult for you to get new credit for
some time after your debt management plan comes to an end. You will also be asked to stop using your credit cards or other
forms of credit whilst the plan is ongoing.
Creditors not legally bound
Unlike other debt solutions such as an IVA where creditors are bound by the agreement, creditors are not legally bound by debt management plans.
This means any of your creditors could still take legal action against you, even when you're trying your best to pay them as per plan.
Alternatives
Although not as well advertised as their commercial equivalent, there are charitable organisations that can help
you deal with debt, they include;
Citizens Advice Bureau: Has offices across the UK where you can get help with a number of issues including debt.
Consumer Credit Counselling Service (CCCS): A charity that can help you manage your debt, they also provide free online debt counselling.
PayPlan: They provide free debt management plans and free debt advice.
Overall, these services can help but not as much as you might expect; the success of the plan largely depends on factors outside of
their control. One of those factors being that your creditors comply with the plan and don't change their mind down the line,
the other is your being able to stick to the plan. Also of note is the fact that you might be able to get the same help at no cost
from the Citizens Advice Bureau.