Debt Management Plans - Pros and Cons
How a Debt Solution Helps Prevent Creditor Harassment
Jan 24, 2009
A debt solution, such as a debt management plan, helps prevent creditor harassment. All unsecured debts, such as credit card debt and unsecured loans, can be included.
A debt management plan is a voluntary agreement between a debtor and creditor. A debtor agrees to make an affordable monthly repayment of at least £100 towards credit card debt, unsecured loans and other unsecured credit agreements. Provided that the debtor continues to keep up with repayments, creditor harassment is very unlikely.
Advantages of a Debt Management Plan
- Stops creditor harassment. A debt management plan may be a voluntary agreement, but most creditors will stop chasing someone for debts when they know they are trying to pay them;
- Prevents personal bankruptcy. A debt management plan can be introduced relatively quickly and, once creditors know they will be receiving a payment, most would rather that than receive nothing by declaring a debtor bankrupt;
- Affordable monthly payment. Signing up to a debt management plan means that a debtor can put all forms of unsecured debt, such as credit card debt and unsecured loans, under one roof. Better yet, a single monthly repayment is made which is disseminated to creditors on a pro rata basis;
- Complete flexibility. As a debt management plan isn't a legally binding agreement, a debtor is free to pay off the debt from a windfall or switch to an alternative debt solution, such as an Individual Voluntary Arrangement, at any time. Alternatively, it is also possible to increase contributions to the debt management plan to reduce the overall debt burden;
- Removes stress and anxiety. Paying money into a debt management plan may create bad credit, but it does allow a debtor to feel as though they are making in-roads into their unsecured debts. This can help someone to sleep more easily as stress and anxiety are reduced;
Disadvantages of a Debt Management Plan
- No guarantee of creditor acceptance. Whilst most creditors will agree to a reasonable offer under a debt management plan, there is no guarantee that this will be the case;
- Credit report. A debt management plan will show on a credit report meaning that further unsecured borrowing is unlikely. However, it may still be possible to borrow, but the rate of APR will be considerably higher. This won't really affect those that already have bad credit as a result of missing payments on unsecured debt;
- No debt write-off. Whilst a debt management plan prevents creditor harassment and can result in interest and charges being frozen, it doesn't result in unsecured loans or credit card debt being written-off. This may make it more viable to consider alternative debt solutions, such as an Individual Voluntary Arrangement where up to 75% of debt can be eliminated;
- Debt management plan charges. The charges imposed by private companies are usually about 15%. This reduces the amount that goes towards paying off unsecured loans and credit card debt meaning that debt problems can last for many years;
- It is still possible to be pursued by creditors. Although vastly less likely once a debt management plan is in place, it remains feasible that creditors may pursue a debtor for any money owed. Unlike an Individual Voluntary Arrangement, a debt management plan is only a voluntary agreement;
- Secured debts. It isn't possible to include secured loans or mortgages in a debt management plan. Only unsecured debts, such as credit card debt, unsecured loans and personal overdrafts can be included.
Whilst a debt management plan prevents creditor harassment, it remains a debt solution that doesn't have a defined term. Unlike an IVA, the debt can last for many years. Debt management plans are good for dealing with small amounts, but those that owe in excess of £15,000 should consider an alternative debt solution, such as an Individual Voluntary Arrangement or personal bankruptcy.
The copyright of the article Debt Management Plans - Pros and Cons in Personal Debt Management is owned by Asa Ghaffar. Permission to republish Debt Management Plans - Pros and Cons in print or online must be granted by the author in writing.
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