Are Debt Management Plans a Waste of Money?
Are Better Debt Solutions Available for Familes with Money Problems?
May 3, 2009
Debt Management Plans are regularly used by families to better manage personal finances, pay household bills and alleviate money problems. This debt solution works on the basis of making a single monthly payment to an intermediary (a private company or debt charity) that disseminates this to creditors on a pro rata basis. Unlike an Individual Voluntary Arrangement (IVA) or Debt Relief Order (DRO), there is no debt write-off.
Debt Management Plan Fees
The overwhelming majority of Debt Management Plans are offered by private companies that operate purely to make profit. Whilst they perform a worthwhile service, it isn't a free service. Intermediaries charge 15 per cent of cumulative debtor contributions. For example, if £100 is paid, only £85 is given to creditors. The first payment is also regularly taken as a fee for this debt solution.
Do Debt Management Plans Freeze Interest Payments?
According to Credit Action's "Debt statistics report, May 2009", British consumers made a total of £69 billion in interest payments during the last 12 months. This equates to the average family paying £2,760 in interest. Whilst it is possible that a Debt Management Plan can freeze interest and further charges, the agreement is purely voluntary in nature. Unlike an Individual Voluntary Arrangement (IVA), there is no legal obligation on creditors not to charge interest.
Debt Management Plans Can Take Years to Clear Debt
Whilst a Debt Management Plan can help a family to manage household bills, it can take years to clear personal debts. This is because this debt solution doesn't secure a debt write-off; it seeks only to manage money problems.
Interest is not charged:
- Mr and Mrs Smith owe a cumulative total of £12,000 to five creditors. They pay £150 each month into a Debt Management Plan and incur a 15 per cent fee on contributions. Their net monthly contribution is £127.50. Although all interest payments and charges have been frozen, it still takes over 7.5 years to clear the debt.
Interest is charged:
- If Mr and Mrs Smith had been unable to freeze interest payments at 10 per cent, their debts would have lasted for 14 years and 7 months.
Alternative Debt Solutions
Consumers with few assets and little disposable income are likely to be better suited by a Debt Relief Order (DRO). Unlike a Debt Management Plan, all personal debts under £15,000 are written-off after just 12 months. No monthly contributions are necessary either. Individuals with debts over £15,000 could consider a different debt solution, such as an Individual Voluntary Arrangement. An IVA allows a consumer to become debt-free in just 60 months.
Debt Management plans do help reduce money problems as a reduced monthly payment allows a consumer to stay in control of their household bills. However, it doesn't write-off debt like other debt solutions, such as an Individual Voluntary Arrangement (IVA) or Debt Relief Order (DRO). This means that personal debts can last for a number of years; other options provide a fresh start a lot sooner.
Sources
Credit Action
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