If you are struggling to make repayments for outstanding debt on credit cards, mortgages, or other types of finance including payday loans, it may be worth considering consulting the services of a debt management company, who may be able to help you to make the process of paying back your loans and managing your debts more manageable than if you deal with it alone. This could also help prevent you spiralling further into debt. But how does a debt management company actually work?
It is important to closely consider what they can offer you and how they may be able to provide both advice and guidance for your situation, to help you determine whether or not their services and help is the right option for you. Also, undertaking a debt management plan is not an alternative to dealing with financial emergencies.
What is a Debt Management Company?
A debt management company (also known as debt consolidation) are companies that help you to create a plan and agreement that sets up an affordable way with which you can pay off outstanding debts.
Their services are better suited to those who are experiencing bankruptcy and would prefer for a third-party to deal with creditors on their behalf, those that have more than one outstanding loan and people who may have been the recipient of County Court Judgements, otherwise known as CCJs (this is when a lender has taken court action against you saying that you owe them money and have not responded to previous letters they have sent to you).
Hence, if you have just one loan outstanding, it may be worth trying other avenues first before getting in touch with a debt management company. Other options may include getting in touch with the Money Advice Service or the Citizens Advice Bureau. You also have the option of getting free impartial advice on how to organise your debt with these advice services and charities. It means you that you can work with them to help you find a way of getting out of debt.
The Role of Debt Management Companies
These companies take on your debts and consolidate them for you. You then pay an agreed amount each month, and the debt management company will deal with the creditors on your behalf.
You will also likely have money apportioned for other necessities such as rent and groceries. This can save a considerable amount of stress, as you will not have to go through contacting each and every creditor one by one; with a plan to stick to, helping you to work away from falling into further debt.
In addition, debt management companies can also negotiate a deal with creditors so that interest is frozen to make repayments easier in relevant cases.
The Difference Between Priority and Non-Priority Debts
If you decide that setting up an agreement with a debt management company is the right choice for you in order to tackle your debts, you should make sure that you fully understand the difference between priority and non-priority debts.
This is because if you have priority debts outstanding, you will need to deal with these separately as a debt management company cannot include these in a debt management plan (also known as a DMP.) The following types of debts are classified as priority debts:
- Outstanding rent
- Council tax arrears
- Gas and electricity arrears
- Income tax payments
- Magistrates' court fees
- Child maintenance arrears and fines
- Mortgage arrears
- Outstanding TV licence payments
The following types of debt (known as non-priority) can however be dealt with through a debt management company. These include
- Water charges
- Credit card payments
- Bank loans
- Store cards
- Benefit overpayments
- Bank loans
What Are the Alternatives to Debt Management?
If you choose to go with a debt management company. You should make sure that they are accredited by the Financial Conduct Authority. You can check the debt management companies registered with the FCA by checking the FCA Register online. You should also remember that debt management companies’ services come at a cost: a fee will be added to your payment plan for helping you to manage your debt.
Debt management companies though are not the only option available, for example, you could set up your own payment plan to deal with debts via creating your own Excel spreadsheet; organising debts you have and organising a payment plan likely to include contacting creditors yourself without paying for a debt management company.
If you are finding it particularly difficult to pay back unsecured debts and live in England, Wales or Northern Ireland, you may be able to get a debt relief order. However, it is important to note that should you meet the criteria (which are strict) it will affect your credit score negatively, remaining on your record for at least six years from the day it starts. This could mean that in the future, accessing credit could be a problem. Nevertheless, if you set up a debt relief order (DRO) all outstanding debts after making payments for 12 months will be written off.