Debt information

What are the Disadvantages of a Debt Management Plan?

If you are thinking of using a debt management company, you should be aware of the following:

• Debt management organisations are usually only interested in customers who have some available income to offer.

• Debt management plans are subject to status and conditions apply.

• Repaying the debt over a longer period may increase the total amount to be repaid.

• Your ability to obtain credit will be affected in the short term and might be affected in the medium term.

• Fees are payable for debt management plans.

• Please note that where the initial payments go to the debt management company and not to the creditors (whether as an initial up front fee, as a deposit or for some other reason) that they will miss a payment to their creditors and will therefore go into arrears or further into arrears. A token payment arrangement should be offered in the short term.

• Please note that creditors are not obliged to accept reduced repayments or to freeze interest and that, unless they do so, repaying the same debt over a longer period of time will lead to an increase in the total amount to be paid.

• Please note that debt collection actions, including default notices and litigation, can continue and that there is no guarantee that any existing or threatened proceedings will be suspended or withdrawn.

• There is still the possibility of default notices with a debt management plan – including that they may incur costs that are added to the debt.

• Please note that by entering into a debt management plan consumers may not be able to obtain credit in the short term and that there is some likelihood that they will not be able to do so in the medium to long term either.

• Please do not be misled into thinking that credit rating will improve earlier than when the payment of the debts is completed, or even immediately thereafter: records are retained by credit reference agencies for a further six years.

• If you enter into a debt management plan tt is very important to meet debts such as mortgage, rent and utility payments as a priority and consumers are advised not to ignore correspondence or other contact from creditors or those acting on behalf of creditors.

• Think carefully before securing other debts against your home. Consolidating debts in to one loan may cost more in the long term. Your home may be repossessed if you do not keep up repayments on your mortgage.

• A lot of debt information is needed to set up a debt management plan.
• Many debt management organisations deal only with non-priority debts and you will have to deal with the more important priority debts yourself
• If the debt management organisation does deal with priority debts, it may not pay off priority debts before non-priority debts
• Most Debt Management organisations charge a fee which can be quite high. Fees can be typically the first two initial payments and then 17.5% of future payments. This leaves you with less money to pay off your debts
• Many debt management organisations will expect a deposit at the start of the agreement with the debt management organisation, in addition to the fee you have to pay. This leaves you with less money to pay off your debts
• Most Debt Management Organisations also charge an administration fee to the customer each month, to pay for the distribution of payments to creditors, in addition to fees and deposits. You need to check if it does and if so, how much it is. It may be up to £30 per month. This leaves you with less money to pay off your debts
• You need to check whether, you can cancel at any time if you are not happy with the service. Check whether you will get your deposit back. You must insist that your Debt Information is returned
• If the debts are rescheduled by the DMC, creditors may consider the account to be in default. Some debt management organisations take all of the first and second months' payments as a fee. This puts the account into arrears by a month or more. These arrears will be recorded on your credit file.
• Most debt management organisations do not give financial advice, and cannot advise on, for example, entitlement to benefit
• Many debt management organisations do not give financial advice and so do not give customers details of all the options open to them with the advantages and disadvantages of each.

• Debt management plans have no legal standing.
• if your monthly payment is low and your debts are high them you will most likely be in a plan for the rest of your life.

Listed below are some of the frequently asked questions on Debt Management Plans

• How do I know whether a Debt Management Plan is right for me?
• What are the advantages of a Debt Management Plan?
• What are the disadvantages of a Debt Management Plan?
• Is a Debt Management Plan a type of loan?
• How long will I have to pay a Debt Management Plan before I am debt free?
• How much does a Debt Management Plan cost?
• How much money will actually go to the companies I owe money to under a Debt Management Plan?
• How do I make the payments?
• If I have a change of circumstance can I stop the Debt Management Plan?
• Who tells the companies I owe money to that I am actually in a Debt Management Plan?
• Will the companies I owe money actually accept a a Debt Management Plan?
• How a will Debt Management Plan affect my credit status with Experian, Equifax and Callcredit, the three main credit reference agencies
• Will a Debt Management Plan stop all the companies that I owe money to constantly telephoning me and sending me letters?
• Will I receive a regular report to inform me that my debts are actually going down?
• After the Debt Management Plan is set will I receive be able to get any additional help and advice?
• After the Debt Management Plan is set up can I still use a credit card or apply for car finance if I budget for it?
• Once the Debt Management Plan has been set up does it mean that I will have to keep paying interest and bank charges?
• Can I include secured loans in a Debt Management Plan, such as car finance or mortgage?
• Can the companies that I owe money to threaten to take my house or flat once that I am in a Debt Management Plan?
• Can I include all my debts in  a Debt Management Plan?
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