Do you need to pay for a debt management plan?
Do you need a Debt Management Company to manage your debt?
If you’re not sure what a Debt Management Company is, don’t worry you’re not alone. If you are experiencing financial difficulties and struggling to manage your debt, it’s good to know more about the options you have, so you can be informed before taking steps that will impact your situation and your life overall.
Not in the mood to read? We got you covered. Listen to the rest with the YouTube link at the bottom of the page
What is a Debt Management Company?
Put simply a Debt Management Company takes control of any debts you have with creditors and brings it into one single monthly payment for you.
Sounds simple right? Well in theory yes, Debt Management Companies can be an attractive option if you’re struggling with debt because the process sounds simple, but there’s a little more to it than meets the eye.
Debt Management Companies aren’t free, their service comes at a price. A price that may impact the amount paid to the creditor. This is a big factor to consider, so we’ll come back to this later on.
For now, let’s explore a little more about how Debt Management Companies work.
How does a Debt Management Company work?
Mark is worried sick with debt. He’s built up over £30k of debt on credit cards and loans. It’s becoming completely unmanageable. Every month £1100 is leaving his account on debts alone and he’s sinking deep into the red. One day, Mark decided to get in touch with a Debt Management Company to see if they could help him take back some control. It took about 2 hours of being passed from person to person, but here’s what happened…
Step 1 – Information gathering
The Debt Management Company started by obtaining all the details of Marks debts. This included things like, who his debts were with, his account balances, and specific information such as reference numbers. It felt quite daunting at first, as they wanted to gather as much information as possible from him. To make it easier, the Debt Management Company asked Mark for any letters or statements that held this information, to create a full picture. Before passing Mark on to the next person, they walked him through all the available options to tackle his debt - an important requirement of the FCA.
Step 2 – Your financial position
Next, Mark spoke to someone who took him through an income and expenditure form, to get a better understanding of his financial position. What they were really looking for here is, what funds he had left at the end of each month. As it turns out Mark could only really afford £700, and he had been paying a massive £1100 up until this point.
Let’s pause here to cover an important point.
The truth is, if you have very little or no funds left at the end of each month, Debt Management Companies may refuse to manage your debt. This might make you believe you have no other options but don’t worry, it’s not the case. All it means is this route is not right for you. If the Debt Management Company does agree to manage your debt, don’t commit to anything without doing your own research first.
Now back to Mark…. Finally, the Debt Management Company went through the terms & conditions with Mark, and a breakdown of fees he would be paying as part of the monthly payment. Mark agreed to go ahead. The paperwork was posted. Mark signed it and so the process began.
Step 3 – Contacting the Creditors
The Debt Management Company proceeded to contact all of the creditors and inform them that Mark was now in a Debt Management Plan. From this point, the Debt Management Company handled all of the correspondence. If Mark received any letters, emails, anything at all about his debt, he just sent the information to the Debt Management Company. When the calls came through he simply informed them that his debts were now being handled by a Debt Management Company.
He then sighed a big sigh of relief because he finally felt in control. It’s important to remember that using a Debt Management Company is just one of many options Mark had to take control of his debt. Before agreeing to an arrangement like this, it’s important to understand what is in it for the Debt Management Company.
What’s in it for the Debt Management Company?
Like any other profit-making business, a Debt Management Company is in business to make money. So, how exactly do they make money from your debt? Well, when you pay the Debt Management Company the agreed monthly payment, they will do one of two things.
Single monthly payment amount
Take a fee from the agreed single monthly payment you are paying them.
For example, if you’re paying £100 per month, they may take £30. This means only £70 of your monthly payment will go towards paying off your debt and the creditors.
Take a fee in the form of a "donation" from the creditors.
For example, if you are paying £100 per month and you have five creditors, each creditor might receive £20 per month, of which a percentage will be paid back to the Debt Management Company from the creditor. It’s very important to be aware this route could lead to a conflict of interest, you might want to read our article StepChange Debt Charity - It’s not as simple as free advice to understand more about this.
Don't forget to read The Real Debt Guy's final thoughts below!
The information in this article is considered to be true and correct at the date of publication.