Is A Debt Management Company Really Worth It?

If you're struggling with debt, many organisations which will settle repayment plans for you. Debt management companies have been around for some time, however with the sharp rise in unemployment an increasing number of people are very likely to require financial help, so it's important you find a company you can really trust.

There are a number of companies who advertise online, and will arrange a repayment plan for you and your creditors. As long as these organisations are regulated by the OFT and have a consumer credit licence, they are legally able to do so.

By reading on, you will have a good understanding of exactly how debt management companies operate, and the questions you need to ask before making an agreement with them.

How do DMP's work?

A Debt Management Plan or DMP offers a structured method of paying off all unsecured debt, instead of just writing off a portion of the money owed (formal debt solutions like an IVA (Individual Voluntary Arrangement). This type of arrangement runs over a longer period than the originally credit borrowed, with one affordable monthly payment being made based on the debtor's circumstances to each of their creditors on a pro-rata basis.

As the number of people with debt problems in the UK are increasing, they are making arrangements for their own debt management plans, and do not require any court assistance. These types of plans operate in a similar way to previous court arrangements, however, customers can now take the first step by pro-actively approaching their creditors by sending them a detailed financial statement of their income and expenses, indicating exactly how much spare funds they have remaining after all there priority with payments have been made. This enables them to negotiate with their creditors to ensure a fair distribution of this remaining cash to them. It's also common for interest payments to be frozen.

Although lenders may be slightly more willing to listen to their borrowers problems, due to the credit crunch in the UK, the idea of dealing with creditors yourself is something that few people would consider doing on their own, as it can be a daunting if uncertain experience especially if you've never done it before.

It's at this point, that debt management companies can negotiate a reduction in your repayments with the creditors, in effect they are acting on your behalf.

How do debt management companies work?

In the UK today, there are effectively two kinds of debt companies, charitable organisations which offer free advice and fee charging debt management companies.

1. Charitable organisations

Charitable organisations like National Debtline, the Citizens Advice Bureau (CAB) and the Consumer Credit Counselling Service (CCCS) can offer you the opportunity of having one-on-one sessions with someone who is paid to help you. They may suggest a number of different of methods in order to help you to organise your own debt management plan.

These types of services shouldn't be confused with debt companies providing free help. There are many commercial companies who claim to be free but will have other ways of charging you. Remember you could obtain free advice from one debt management company but there's absolutely nothing to stop you shopping around.

The main problem with free debt advice agencies are that they're facing large backlogs as the UK's debt problems continue to increase, for example, CAB claims it has to deal with around 7000 new debt problems each day, with some people having to wait as much as 3 weeks for help.

2. Commercial organisations

In sharp contrast, commercial debt management companies will quickly deal with problems and have an added advantage that they offer to administer repayments for you, i.e. payments are made to them and they distribute it (as agreed by you) directly to all your creditors. A fee will be charged for using this type of service, which is a percentage of your normal payment. But, there are debt management companies who are more likely to negotiate better terms with your creditors so the fee they charge may well be worth it.

Main considerations:

• How much debt help do you really need?
• Is the advice you are receiving truly free?
• How long do you have to wait for free advice and practical help?
• Are you happy to administer the payments yourself or would you be better of someone else managing it?

How to find the right debt management company

There are a number of factors you should consider when deciding on the right debt management company, for example:

How fast will you be able to repay your debts?

there are a number of plants which means that you only make the minimum possible contribution, for example one pound every month. Whilst this may seem like an attractive idea, it could mean that you are lumbered with having a lifetime of debt repayments. Think about trying to pay the maximum contribution or creditor that's affordable for you; the more you pay off, the quicker you'll become debt free.

What fees will you be charged?

Some debt management companies will charge a fixed fee of about 15% of your repayments. Additionally, there can be an admin costs. Remember that you need to read the terms of your plan carefully, and only agree if you are happy with the fees. You could also try to negotiate with the debt company, and never pay for upfront advice.

What do you get for your money?

It's a good idea to know what exactly you're getting for your money. Similar questions you could ask include:

• Will a dedicated account manager deal with all your enquiries?
• Can any issues with your creditors by forwarded to this account manager?
• Will the company manage all correspondence with creditors on your behalf?
• Does the company administer all repayments on your behalf?
• Will you receive assistance throughout your plan's term?

Is the company regulated?

Is the company fully regulated by the Office of Fair Trading? How long has been around? Does it have any reviews? Does the debt management company conform to the OFT's guidelines? If you've any concerns whatsoever, you can check out the debt management companies on the official Consumer Credit Register on the OFT's website.

What are the best debt management companies currently out there?

One of the main things to think about when choosing a debt management company is to consider is what type and level of service is available instead of simply choosing a company which is the cheap. Comparing on price alone may not suite your needs and you should certainly shop around and find a suitable one which can address your current needs.

Is there anything else that you should consider?

Taking out a debt management plan can certainly affect your ability to obtain credit in future, as there will be a reference to it on your credit file. You should certainly not enter a debt management plan lightly for this reason as well as the other considerations noted above. Check and see whether you can resolve your debt problems with either better budgeting, or by lowering your increasing your income and outgoings.