Debt Management Plan

A debt management plan is an informal arrangement between you and your creditors to enable you to repay your debts with regular repayments you can afford. A debt management plan may appear to be similar to that of an IVA, which is governed by the Insolvency Act of 1986 and designed to help you avoid bankruptcy. However, an IVA is legally binding unlike a debt management plan which is not.
Because a debt management plan is less formal than an IVA, this may afford you more freedoms to pay back your debts as and when you can, over a longer period of time, however you must be aware that because a debt management plan is not legally binding your creditors can in theory, still proceed with court action.

How it works

After an individual has been accepted as a new customer the debt management organisation will collect information about the debtor:

  • creditors (e.g. lender, account number, type of credit, balance, etc.)
  • monthly income (e.g. salary, benefits, etc.)
  • monthly expenditure (e.g. rent, utility bills, car/transport, etc.)

From this information, they will agree an affordable payment which the debtor will pay to the debt management organisation on a monthly basis.

At this point they will make contact with creditors to explain the situation and try and reach a settlement on behalf of the debtor. In doing so they will try and negotiate the following terms:

  • reduction in the overall level of debt
  • freeze interest charges
  • reschedule the debts to be paid off over a longer period of time
  • try to prevent the creditor progressing legal activities

Although they will endeavour to get the best result possible, there is no guarantee that they will be successful in these negotiations.

Professional fee-taking debt management companies will often take the first monthly payment to cover the costs of the processing and negotiation that they have to carry out on the debtors behalf. After this they will take approximately 15% of any further monthly payments. The remaining money each month will be shared out pro rata between the creditors.

No-fees debt management organisations offer a very similar service. The agreed monthly payment will be the same, however they will start paying off the creditors immediately, and all 100% of each monthly payment will get divided amongst the creditors (without a 15% handling fee). These organisations are paid instead by the creditors who give them 15% of whatever has been collected for them.

No-fees debt management organisations have been very popular recently as the number of people in the UK with debt problems has increased significantly. As such some of them are very busy, and some have found it faster to work through a fee-taking company instead.