What do debt management services do?
Debt Management Services will attempt to negotiate with your unsecured creditors so that they will accept a lower monthly repayment over a longer period of time.
They also request as part of the Debt Management Services that interest and late payment charges are stopped, although as Debt Management Plans are informal agreements, creditors are not legally obliged to accept the proposed revised terms.
The offer that is made to your creditors is based on the following calculation:
First, the amount you can realistically afford to give to your creditors is calculated by subtracting the amount you spend on essential livings costs each month (such as food, rent/mortgage, travel and any priority debt arrears such as Council Tax) from the amount you have coming in. You will need to stick to this budget for as long as the plan lasts so it’s important that you are honest about your outgoings with your Advisor. This amount is then split into smaller amounts that are in proportion with how much you owe each creditor.
So for example, if you were able to offer your creditors £100 in total each month and you had three unsecured debts, Creditor A – £5,000, Creditor B – £2,500 and Creditor C – £2,500, then £50 would go to Creditor A (because £50 is half of your monthly repayment and Creditor A is worth half of your total debt), £25 to Creditor B and £25 to Creditor C. The creditor payments are calculated this way so each debt takes the same length of time to be paid back in full. This way, your creditors can see that you’re being as fair as you can, which means you’ve got a much better chance of them agreeing to the plan.
For more information about the different types of Debt Management services that are available, see do all debt management companies charge fees.
You can read more about Debt Management and whether it is suitable for your situation in our Debt Management section.
Debt Advice Foundation is a registered UK charity offering free, confidential support and advice on any aspect of debt, including Debt Management. If you need to talk to someone about Debt Management or would like to discuss the alternatives, please call to speak to an adviser.