If you're struggling with your finances due to unmanageable debts, finding a debt solution that can improve your situation is important. One such debt solution could be a debt management plan: an informal arrangement with your lenders, in which they'd be asked to accept reduced payments towards your debts.
Quick guide to debt management plans
A debt management plan can make your unsecured debt repayments manageable again by reducing them to an affordable level. You'll agree to make smaller monthly payments over a longer period of time - this could go on either until your circumstances improve (and you can afford to pay more again) or until your debts are cleared.
Your lenders may also agree to reduce or freeze interest and other charges, which can prevent your debts from growing, and this will mean that more of each payment goes towards settling the debt itself. Note that if they don't freeze interest, you can end up paying more in total as the debt will be accruing interest for longer.
Also, please note that your lenders don't have to agree to smaller payments - and that failing to repay any debt in the way you originally agreed can damage your credit rating.
What costs can a debt management plan help with?
A debt management plan is primarily designed to help with the cost of servicing non-priority debts - that is, debts which don't directly threaten your standard of living if they're left unpaid. This includes things like unsecured loans, credit cards, overdrafts and store card debts.
By contrast, your priority debts include things like your mortgage, secured loans and utility bills. Left unpaid, these could result in the sale of your home or the disconnection of your utilities, so they are a priority. It's not that your non-priority debts aren't important - it's just that your priority debts are more important.
Your debt management plan can't help directly with these costs, but it will help indirectly with your priority debts and other essential costs (such as the cost of food and transport), because your monthly payments towards your debt management plan will be arranged to fit around these.
So, for example, if your take-home pay is £1,000 a month and your essential costs - including priority debts and your bills - come to £800, you'd have £200 left over to put towards your non-priority debts through your debt management plan.
Is it the right debt solution for me?
This depends on your circumstances. Debt management plans are designed to help people who can't afford their existing repayments, but can afford smaller payments that will clear the debt within a reasonable period of time.
If your debts are manageable, or if you don't think there's any way of completely clearing your debts, then a debt management plan won't be suitable, and you'll need to consider your other options.
Either way, talking to a debt adviser can help you make an informed decision.
For more information on debt management in the UK visit Think Money.
