Debt Management Plans – Are They Worthwhile?
With the proliferation of credit facilities being offered over recent years, sometimes, on the face of it, with little or scant regard being paid to the ability of the borrower to finance the level of loan being offered, more and more people have come to find themselves indebted to one or more financial institution. In times of austerity, they may find that their projected income was too optimistic or they may have even lost their employment. Of course, there are also those who were ill-advised to borrow in the first place and who never, in reality would have the means to settle the loan or loans. Whichever category a debtor may fall into, the result can be non-payment of certain monthly installments, having to cut back on some of life’s necessities or a complete default in repayments, all of which are financially unpalatable.
A search of the internet under the words “debt management” will result in a multitude of sites that the debtor can go to. The focus of these sites is to seek to come up with a plan – a debt management plan – to assist the debtor in meeting his obligations to all of those to whom he is indebted. The way that this works is that the debt management company negotiates with the various creditors a reduced level of installment with the intention that they will recognise that the debtor is more likely to pay off the debt with a more manageable monthly payment. The debtor’s rent or mortgage payments and other essential expenses are calculated and the balance is considered when arriving at a figure for the monthly repayments under the debt management plan. The debtor can find himself with a much-reduced monthly payment, which can avoid the consequences of defaulting in repayment.
On the face of it, this would appear to be an ideal scenario. However, it should be said that, save for governmental, non-profit making or charitable debt management services, it is likely that the debtor will be charged a fee for the service provided in procuring the debt management plan. The fee can either be a one-off payment for negotiating the plan or an ongoing management payment if, say, the creditors require a regular review of the plan. These payments can be substantial, particularly for someone who cannot afford to pay their debts!
A second disadvantage is that referral to a debt management agency may well result in an adverse credit rating (although it should be borne in mind that default in payment of debts, court judgments and bankruptcy also have detrimental credit rating consequences.)
Debt management plans are not for everyone. However, they do have their place in the financial world, and this is unlikely to change in the foreseeable future. If you feel that a debt management plan is for you, then you should certainly consider whether a non-fee paying service is available to you. If it is not, you should be careful when considering which fee-paying service that you wish to engage. Look carefully at the amount that they charge. Consider, for instance, whether you are asked to pay a flat fee or a fee that represents a proportion of your indebtedness. Ascertain whether you will be asked to pay further fees if and when the situation of your debt management is reviewed. Shop around as much as you can and, importantly, try to take some independent advice before committing yourself to any particular debt management service.