Frequent FAQs on debt management

Frequent FAQs on debt management

Have your debt problems got to the point where you can’t afford the repayments anymore? If so, a debt management plan could be the solution.

A debt management plan is an informal arrangement with your creditors: you’d ask them to accept lower monthly payments towards your debts (based on the maximum you can afford) so you can meet your other essential costs as well as your debt payments.

However, please note that repaying your debts more slowly than you originally agreed can have an impact on your credit rating and may end up costing you more in the long run.

Even so, it can be a very effective solution for many people’s debt problems – but there are a number of things you’ll need to consider before you start. Here we look at a few things you may be wondering before starting out on a debt management plan.

1. Is a debt management plan right for me?
Debt management plans are designed to help with unmanageable debt. Because it’s an agreement that involves moving away from the repayment terms you originally agreed, your lenders simply won’t accept a debt management plan unless they can see it’s the most realistic way for you to repay your debts.

You will still be expected to repay your debts in full over time, so if this doesn’t seem realistic, a debt management plan won’t be appropriate.

Also, remember that even if you do qualify for a debt management plan, it might not necessarily be the best option for your specific circumstances. Always discuss your options with a debt adviser before you make any firm decisions.

2. How does debt management reduce my payments?
On a debt management plan, your monthly repayments will be reduced to a level you can afford. This will be calculated by looking at your total take-home income (your salary, minus tax and other deductions) minus your total essential outgoings. What’s left can be divided between your unsecured lenders.

You’ll be expected to pay as much as you can towards your debts, so you’ll probably have to give up ‘luxuries’ / non-essentials.

3. Will a debt management plan write off any of my debts?
A debt management plan is a new repayment plan for your debts, and you’ll still be expected to repay your debts in full.

However, it’s common for interest and other charges to be frozen on a debt management plan, which can stop your debt from getting bigger, and this also means that more of each payment is going towards paying off the debt itself.

4. How long does a debt management plan last?
There is no set time period for debt management plans. How long your debt management plan takes will depend on how much you owe, how much you can afford to pay each month, and whether your lenders agree to freeze / reduce interest, among other things.

5. What happens if I can’t keep up with my debt management plan?
Because they’re informal, debt management plans tend to be more flexible than some other debt solutions, and there could well be some leeway for a further reduction in your payments if your circumstances deteriorate. However, this will need to be agreed with your lenders in much the same way as your original debt management plan terms.

Of course, some people’s circumstances may change in a way that means the debt management plan is no longer suitable. If this happens to you, talk to your debt adviser and find out if another debt solution may be more appropriate.

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