How soon can a debt management plan clear my debts?

3 February, 2010

For people who find themselves faced with unmanageable debt, the most important thing is finding a straightforward way of clearing those debts. One debt solution that could help is a debt management plan: an informal arrangement in which the borrower repays their debt at a pace they can manage.

What does a debt management plan do?

On a debt management plan, you’ll negotiate with your lenders (or ask a debt management organisation to do it for you), telling them you can no longer afford your payments as they stand – and asking them to accept smaller monthly payments than you originally agreed when you first borrowed the money. You will be expected to pay as much as you can afford once your other essential costs (e.g. housing costs, groceries, utility bills, etc.) have been covered.

You may also be able to negotiate a reduction or a freeze in interest and other charges, which can stop your debt from getting any bigger and help you to pay off the debt sooner.

How soon will I be debt-free?

Unlike some debt solutions, such as an IVA (Individual Voluntary Arrangement), there is no fixed period of time for a debt management plan. How long it lasts (and therefore how soon you can clear your debts) will depend on how big your debts are, how much you can afford to pay each month, and whether your financial situation changes while your plan is in progress.

As mentioned previously, your payments will be based on the maximum you can afford once other costs have been considered.

So, as a basic example, if you have £8,000 of debt and £200 a month to put towards your debts, and your lenders agree to freeze interest, it would take you 40 months (three years and four months) to pay off the debt. This may, however, change if your finances get better or worse in the meantime

How can I enter into a debt management plan?

It’s possible to do it alone by negotiating with your lenders directly. To do this, you’d need to draw up a ‘budget plan’, detailing your income and outgoings and showing how much disposable income you have left to put towards your debts once your essential costs have been covered.

However, this can be a daunting and/or time-consuming process. Many people prefer to arrange their debt management plan through a professional debt management company, which can carry out negotiations with their lenders on their behalf. Another advantage is that the debt management professionals will be there to answer any questions the borrower may have for the duration of the debt management plan, and can talk to their lenders about any concerns that arise while the plan is in progress.

What are the alternatives to a debt management plan?

Debt management plans have helped many people get out of debt, but they’re not for everyone. Depending on your circumstances, it may well be that another debt solution is more suitable. A debt adviser can help you to decide.

Other debt solutions for people with unmanageable debts include:

IVA (Individual Voluntary Arrangement)

A formal debt solution in which you’ll repay as much as you can towards your debts over a fixed period (usually five years). Like a debt management plan, you’ll be expected to repay as much as you can afford, but after the agreed time your remaining debt will be written off.

Only suitable for people who cannot realistically afford to repay their debts in full.

Bankruptcy

Although bankruptcy is considered an absolute last resort by many, it can in fact be the best solution for some people’s circumstances. It doesn’t always require regular monthly payments, and it’s often over within a year.

Remember, all of the debt solutions mentioned in this article have their disadvantages as well as their advantages: for example, they will damage the borrower’s credit rating. Before you commit yourself to any particular approach, you should get a debt adviser to help you decide which is best for your situation.

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