Knowing how debt management plans work is the first step towards debt freedom. So what is a debt management plan, and how is it different from other options, such as bankruptcy and IVAs?
Debt management plans are ideal if you just need some extra time to clear your debts. They can (sometimes) freeze your fees and interest, or reduce your total debt, but sometimes they just put in place a schedule to pay your creditors what you owe.
In this guide, we’ll take an honest look at how a debt management plan works. We’ll also answer some FAQs, like whether a debt management plan affects your job, and whether you can rent a property during a debt management plan.
what is a debt management plan?
A debt management plan is an informal arrangement with your creditors to repay them what you owe. It’s useful if you’re struggling to make your minimum monthly repayments after covering the essential running costs of your household.
You can either negotiate directly with creditors or use a licensed debt management company or charity to handle it for you. You’ll make one monthly payment to the company or charity, and they’ll distribute it among your creditors.
how debt management plans work
Debt management plans work by restructuring your debts, usually over a longer amount of time, so that you can make smaller monthly payments and keep within your household budget.
This can be a great way to deal with changes in circumstances, for example:
- Losing your job or taking a pay cut
- Earning less if you’re self-employed
- Rising payments due to interest rates
Creditors will often be open to setting up a debt management plan, because it usually means they get back the full debt (it just takes longer). It’s also a way for you to avoid more formal alternatives, like declaring bankruptcy.
debt management plan or bankruptcy?
Everybody has heard of bankruptcy, but not everyone knows of less formal alternatives like IVAs, debt relief orders (DROs) and debt management plans.
Yet if your debts are only just unmanageable, a debt management plan can be much less disruptive to your lifestyle – especially if you own a property (with or without a mortgage) or a car.
bankruptcy
Some things to know about bankruptcy:
- Listed in publicly available records
- Stays on your credit file for 6 years
- You may need to sell assets (e.g. house and car)
Bankruptcy is not free. There’s a £680 fee, and your creditors can continue to collect debts from you until this fee is paid.
debt management plan
A debt management plan is less formal and can be agreed through a debt management company or directly with your creditors:
- One monthly payment (if working with a debt management company)
- Option to adjust payments if your circumstances change
- Can be short-term if you just need to clear a bump in the road
Your debt management plan ends when you clear your debts, or if things improve and you’re able to go back to making full monthly payments.
frequently asked questions about debt management plans
is a debt management plan right for me?
There’s no minimum or maximum amount of debt that can be restructured using a debt management plan, but there are some useful guidelines to follow:
- Your essential living costs leave you unable to pay all of your monthly debts
- You can’t afford to clear your existing debts in less than six months
- You are able to pay something towards your debts each month
- The amount you can pay will clear your debts after a reasonable length of time
If all of the above sounds like a good description of your current financial situation, then a debt management plan might be the best way to tackle your debts.
will a debt management plan affect my job?
A debt management plan usually won’t affect your job. It’s rare for your employer to check your credit rating or how much debt you owe. There are two main exceptions to this:
- You work with money (e.g. in a bank)
- You work in a position of trust (e.g. a police officer)
Being in debt could make you more of a security risk. But this is unlikely, and a debt management plan is a sign that you are working to get your finances back on track.
can I rent a house/flat during a debt management plan?
Yes. If you are already renting, you can continue to do so. Your landlord might agree a rent reduction or a repayment schedule as part of your debt management plan.
If you need to move house, your debt management plan will not show on your publicly available credit report (unlike a bankruptcy). Your new landlord or letting agent will need your permission to check your full credit report.
