Debt management involves taking all your outstanding debts and putting them into a well-organised plan to help pay you them off. This process is not usually for an individual with just one or two outstanding payments, but rather multiple repayments and someone who is experiencing a debt spiral, county court judgement or bankruptcy.
Also known as debt relief, debt consolidation and debt solution, a plan can be created by the individual but it is commonly left to debt management company or charity such as Stepchange.
It is common for UK households and consumers to face debt at some point in their lives. In 2015 alone, around 300,000 people contacted the MoneyAdviceService asking for debt advice, with the average household debt at around £13,520 (Source: The Independent).
Living in expensive cities and surrounded by consumer products and adverts, it is sometimes easy to spend beyond our means. Plus, if you fall into debt, there is always the temptation to continue applying for loans in order to resolve your cash flow shortage by using one to pay off the other. Meanwhile, this can actually make the situation worse and lead to a spiral of debt.
The process taken by debt management companies
If you have several outstanding debts and are in need of help, you may reach out to a debt management company or find that you have been recommended their services by other companies. Although it varies between companies, we explain the approach taken by a debt management agency to help you get over debt.
Step 1 – Compile all your debts
The debt relief company will start by asking for all your outstanding debts including the amounts you owe and the names of the companies that you owe them too. Not all your debts will be included but this is strongly advisable. No need to hide anything at this point. This includes anything from loan arrears, credit card bills, payday loans and guarantor loans. This will give them an overview of your current debt situation and how much is outstanding.
A guarantor loan can be added to a debt management plan but usually if the individual does not keep up with repayments, the creditors will try retrieve the amounts owed from the guarantor who originally co-signed your loan agreement.
Step 2 – Your income and expenses
The company will need to get an understanding of your current income and expenses. By reviewing your current employment status, income and all your living expenses including rent and mortgage payments, they can start to calculate how much you afford to repay each month whilst still maintaining a decent quality of life, including things like your Sky TV and gym membership.
Step 3 – Approaching the creditors
Once the debt company has a better idea of what you can afford to repay each month, they will start approaching the companies that you owe. They will explain that you are currently working with a debt management company and can afford a certain repayment amount each month.
The payments are calculated on a pro rate basis depending on the amount that is owed to each creditor and this will vary from company to company. For example, the debtor could be paying several companies £1, £5, £10, £20 or £50 per week or month over a long period of time, sometimes lasting several years.
Naturally, your representatives may prioritize some debts more than others, such as those where there is a risk of repossession or have been outstanding the longest.
Step 4 – Creating a debt management plan
Your debt manager will then create an official plan which highlights your income, expenses and amount that you owe each month. All your expenses will be taken into consideration so that you can still afford the necessities including accommodation, bills, mobile phone contract, gym membership, TV license and food.
Your debts will be organized with each creditor and how much you owe them e.g £5, £10, £20 per month.
Step 5 – Start paying off your debts
Your debt relief plan begins and can be paid weekly, fortnightly, monthly or depending on the company and repayments are made with a direct debit or standing order. (Source: Pay Plan)
This ensures that your income is spent responsibly on paying off your debts and you will be eventually debt-free after a number of weeks, months or years.
The advantages of using a debt management company
The benefit of using a professional company is that they are experienced with helping people overcome their debts. They are likely to have already worked with several lenders and providers so will be able to negotiate on your behalf.
Above all, they should freeze the interest on your loans and it should put a stop to all the letters, phone calls, emails and text messages that you have been receiving from companies chasing up your debt – and this will instantly take away a lot of the stress. Plus, you are still able to keep the things you need in life such as food, TV and other essentials.
The disadvantages of debt management company
The downsides are that unless you work with a charity, there are usually fees involved for managing your debt – which is just extra costs that you can’t afford at the moment. Some companies charge set up fees so it is important to look out of this and be aware of this upfront.
In addition, by committing to a long-term plan, you are surrendering your financial freedom as you cannot make random or impulsive purchases and you are confined to a budget – which may last several years. You are also under pressure to keep your current job as losing this or your regular income will cause your plan to fail. One of the ways to alleviate this could be by getting an increase in salary from work, selling your car or home or even earning an inheritance.
What alternatives are available?
There are free and impartial charities in the UK such as Citizens Advice Bureau and MoneyAdviceService who can offer advice and help you get through your sticky situation.