What is Debt Management?

Most people have some sort of debt. This is not necessarily bad news as using credit can actually be a good thing. This is because it can help to improve your credit rating. The problems start if you cannot afford to repay any debt that you have. At this time you need to use debt management.

Debt management helps because you need to be able to live, while paying off as much debt as possible. This is easier to do when you are managing your debt.

Why debt management is important

You should not simply ignore problems with debt because if you do, your credit rating can be adversely affected. If this happens, you can find it difficult to get any form of credit.

This is why, if debt is causing you a problem you need to start managing it straight away. The first step is usually to create a debt management plan. It’s important to note that debt management plans can only include unsecured debt. Therefore, if you have a problem with secured debt, such as a mortgage, you need to deal with this separately. It’s usually a good idea to get in touch with the lender and see if you can reach an agreement with them.

If you have problems with unsecured debt, you have two choices. You can create a debt management plan yourself or you can have one created for you.

What is a debt management plan?

It’s useful for you to know what a debt management plan is before you make any decisions. A debt management plan is a document which details how you will pay off your debt. You can use it to help you reach an agreement with your creditors.

Do not forget that the main aim of your creditors is to get their money. This is why they will often be willing to negotiate with you and agree your debt management plan.

Having a debt management plan created for you

You can approach a reputable company to provide you with credit counselling and complete a debt management plan for you. You will normally need to pay an admin charge at the start of the process.

Many people prefer to use a third party to help with debt management because they can negotiate with creditors. They can often get the amount of debt reduced or reach an agreement on lower repayments. If the third party manages to do this for you, you need to make sure that you pay on time each month.

You may also have the option to consolidate your debt. This means that you only have to make one payment to the company. They then distribute the money to your creditors. You can only usually do this if you have a previous good credit history.

Creating your own debt management plan

If you like the idea of taking things into your own hands you can create your own debt management plan. In addition, you can also negotiate with your creditors. The first thing you need to do is complete your Statement of Affairs.

This statement contains details of your financial position, so need to be able to provide a copy to your creditors. In this statement you should include:

Details of all unsecured creditors and how much you owe to them.
Information about your household income.
A record of your household expenditure.
A calculation of your disposable income (The difference between your income and expenditure). This is the amount that you can put towards paying off your debt.
Details of how much of your disposable income each creditor will receive. You should divide your disposable income on a pro-rata basis. This means that you should allocate the highest percentage to the creditor who you owe the most to.

Once you have completed your statement of affairs (which forms your debt management plan) you need to start negotiating. In order to start, you should send a copy of the statement, and a covering letter, to each creditor. In the letter, you need to ask them to agree the plan and to freeze interest payments.

Start making payment straight away as this will show your creditors you are serious. It may take a couple of months for them to agree the plan. In the meantime, if you have any problems you may want to seek help from a third party.

Debt management is not a quick fix for debt problems. However, it is a good way of starting to deal with debt issues. It may take several years to pay off all your debt but at least you can avoid bankruptcy.

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If you are considering a loan please make sure you can afford to repay it back in time. Late repayments can cause you serious money problems. For help please go to moneyadviceservice.org.uk