Debt Management

Option # 3/ Set up a Debt Management Plan

This involves working out your 'priority' expenses — mortgage, rent, council tax, utility bills, car, child maintenance, groceries, day-to-day living, etc, and dividing what is left (if anything) equally between your creditors.

If your debt is extensive and your offer of payment is small, it is unlikely that your lenders will accept it (it would take too long to pay off). However, even if your offer is declined, it is still a good idea to make a nominal monthly payment (even if it's only £1). It's up to the lender to decide to accept it. And if you're biding time while considering your best course of action, you cannot be accused of ignoring your responsibilities.

A Debt Management Plan is an informal arrangement, and can (and will) be reviewed by your lenders at any time. You can contact your creditors yourself to propose a plan, or the CCCS will administer a plan on your behalf free of charge. (contact details for the CCCS at the end of this report)

How does a Debt Management Plan work?

The DIY route

There are both advantages and disadvantages in contacting your creditors yourself. The upside is you can take control of your situation, which leaves you feeling more...err...in control. Also, your creditors will always prefer to communicate with you in person instead of through a third party. By grabbing the initiative, you will receive less hassle generally.

Wherever possible, it is always preferable to deal with your creditors in writing rather than on the phone.

The downside of speaking on the phone with the banks' collection departments, and the debt collectors and solicitors who work for them, is that it leaves you open to pressure. You are dealing with people whose performance is assessed on how much they can squeeze out of you. They will very often put weight on you to agree to preferential payments or amounts that you simply can't afford, and they are very good at it.

If you don't contact them first, when you begin to miss payments your creditors will very quickly contact you by letter and by phone to find out what's happening. They will often come down hard from the outset, their aim being to let you know that you are in for a rough ride, just in case you thought otherwise!

If you continue to miss payments, or proceed to pay but with reduced payments, you will at some point be issued with a Default Notice. This is a formal notification that you have broken the terms of your loan agreement, and must always precede any legal proceedings. However, it does not necessarily follow that because you've received a default notice you will be taken to court. In many cases your creditors simply won't bother, or they'll bide their time and take you to court on a whim further down the line. Their decision will depend on many factors, but the main one is whether you have any assets worth chasing, and in particular whether you own your own home. They are able to find this out by searching the Land Registry. (See Charging Orders, below.)

The best course of action at this stage is to anticipate the banks' reaction by making a list of your monthly expenditure - including a list of your creditors and what you owe each of them - and working out how much you can realistically afford to pay your creditors each month.

Send this list with a covering letter (very simple and concise) outlining your circumstances to your creditors, making them an equal offer.

Your payment offer should be an equal division of what is left after you've deducted ALL of your essential living expenses, mortgage / rent / child maintenance and secured debts. Don't short-change yourself. There is no point in making an offer that you can't afford.

Always allow for unforeseen expenses (the car breaking down or your boiler exploding, etc) Adjust your sums in your favour to give you a healthy surplus. Believe me, nobody will thank you for doing otherwise.

Do not favour one unsecured lender over another. The only time that it may be wise (unofficially) to favour one creditor over another is if you are being threatened with a charging order,* a County Court Judgement* or a visit from a bailiff*. An offer of an increased payment in these circumstances will sometimes get them off your back and give you breathing space to react intelligently. (Like catching the next flight to Brazil?!)

ALWAYS prioritise the following:

• Essential services
• Household expenses
• Council tax
• Insurance payments
• Car / transport costs
• Mortgage / rent
• Secured loans
• Payments to loan sharks*
• Child support payments
• Any other essential personal expenses

Interest

When you make your offer, you should also ask your creditors to freeze the interest on your borrowings. They are not legally obliged to do this, but they will often agree on the understanding that you stick to the plan. Also, they have to be realistic: if they were to continue piling interest upon interest, it's very likely that your repayment plan would remain in place long after you've popped your clogs!

Unless your offer is realistic, in most cases your lender will formally refuse it, in which case you should pay them anyway.

If your creditors accept your offer, it will be subjected to regular reviews. Like it or not, during this period you're going to receive a lot of letters and a lot of phone calls, until your debt is resolved one way or another. It won't go away of its own accord — at least not for six years. See 'the six year rule', below.

An important Note

Even if you appoint an agency to deal with your creditors on your behalf, your creditors will continue to contact you in person until they are satisfied. They will not be by-passed. Be warned.

How does a Debt Management Plan work? (2)

The CCCS route

When you contact the CCCS, they will arrange a time for a debt counsellor to call you back. Be prepared to wait days, if not weeks, for an appointment — these guys are rushed off their feet.

The initial telephone 'interview' can take an hour or more. Before the call, you be will asked to prepare a detailed list of your creditors and what you owe them, as well as your income and outgoings. Your counsellor (who is invariably helpful and supportive) will then prepare a thorough review of your position and advise you on the best course of action.

If they think that your level of debt is such that your disposable income will not support a debt management plan, they will tell you, and suggest an alternative course of action (discussed below).

If your counsellor thinks a debt management plan is a realistic option, they will write to your creditors with a proposal. They know from experience what a creditor will and will not accept, so if it goes this far, it is likely that your proposal will be accepted, subject to regular reviews.

A 'review' entails the CCCS (and often individual creditors) contacting you at regular intervals to confirm that your financial circumstances haven't changed. This can work either way. If your income decreases you can offer a reduced payment.

But there is no guarantee that your reduced offer will be accepted by your creditors, in which case the plan could fall apart.

Of course, at all stages of the process, it's up to you how honest you wish to be with regard to your financial position. By rights you should be able to 'prove' your case on paper, but in practice you are unlikely be asked. Remember, we're in the grip of a debt epidemic. There simply aren't enough resources to investigate individual cases. You are a faceless statistic, and you will be processed accordingly.

Paid debt management - a word of warning!

The Yellow Pages and the Internet are crowded with companies that will claim to 'manage' your debt for a fee (It's big business!). They come across as very plausible, make any number of lavish promises (e.g. that if you use their services it is 'unlikely' that you will be taken to court, made bankrupt, etc). When you're feeling desperate, these people can seem like an appealing prospect — they know that you will do almost anything to get those pesky banks off your back! You'll even pay through the nose!

These companies cause more trouble than they are worth. They differ from the CCCS only in that they will CHARGE you for the same (and usually inferior) service.

However unpleasant the prospect, always deal with your creditors yourself or through a legitimate free agency. Debt management companies profit by keeping their clients in a state of limbo for as long as possible. They're in a numbers game. The longer they can keep you paying them, the more money they make. They will squeeze you for what they can get, until eventually you come to your senses and stop paying them. They also do a very basic job. Apart from issuing your creditors with a crude standard letter and a photocopy of your expenditure, they do very little.

They will assess your position in the same way as the CCCS; they will make payments on your behalf to your creditors in the same way as the CCCS. But, unlike the CCCS, instead of dividing your disposable income between your creditors, they will first take a significant monthly fee for services rendered, and they will always do their sums to make sure they get paid first — before your creditors!

This is money that could instead be divided among your creditors — possibly making the difference between a realistic plan being accepted or rejected! Unlike the CCCS, paid debt management companies will often present your creditors with a 'take it or leave it' offer on your behalf, rather than seek a mutually acceptable agreement. Small wonder then, that the banks get pissed off and put the heat on you in retaliation.

Unlike the CCCS and the Citizens'Advice Bureau, private debt management companies will not necessarily give you impartial advice, and in particular they will not advise you to go bankrupt, even when it is in your best interest to do so. Why? Because if you go bust you won't be paying them any money! They are running a business - their first priority is to themselves. The longer they keep you hanging on in 'debt limbo' the more money they can extract from you along the way.

Private debt management companies will tell you that they will negotiate and deal with your creditors on your behalf. They claim that they will give you peace of mind.

Don't believe a word of it!

Banks and debt collectors dislike intensely dealing with these companies, and they will do everything to by-pass them. They feel they are taking money from debtors that should rightfully be going to them. The upshot is they will continue to hound you as ever before. Employing a debt management agency will not make your debt go away.

To sum up

If you follow the rule to the letter, then a debt management plan involves a pretty austere future, because whenever your circumstances improve you should, by rights, up your monthly repayments. On top of this, your lenders will always inform the credit search agencies of your circumstances, so your credit rating will be remain in tatters for as long as the plan continues, and then after that for a further six years (see the 'six year rule', below).

I know of someone on a debt management plan who is paying off a debt of £10,000 at a rate of £89 a month. It will take her almost ten years. This means that - on top of the financial hardship - her default will remain on file with the credit rating agencies for a total of sixteen years! Had she simply paid nothing, her credit rating would be clean after six years. This case is not untypical. There are too many people unnecessarily committed to 'ball and chain' repayment plans that they struggle to afford (along with unnecessarily bad credit ratings) that will outlive their useful lives. They are very often oblivious to the fact that had they declared themselves bankrupt they might have been spared the misery.

Unless your level of debt is very low and can be paid off quickly, a debt management plan leaves little light at the end of the tunnel. So you will have to ask yourself whether it's really the best course. Some might argue that the best thing about a debt management plan is that it gives breathing space while you examine your long-term options, such as...