An alterative to Bankruptcy and IVAs: What are Debt Management Plans?
A debt management plan is a similar debt management solution to that of an IVA in that it is an agreement to pay back debt over a number of years, without the individual suffering from the constant fear of further pursuit from creditors.
However, unlike an IVA the debt management plan has no legal status within the court system and debts are not automatically written off at the end of debt management plans as they are with an IVA. However, offering to formulate a debt management plan is often a positive indicator to creditors that an individual is attempting to deal with debt problems in an organised way.
In short, creditors often look favourably upon debt management plans as they may stand to recover more debt in the long run than if an individual is declared bankrupt or enters into an IVA.
How to Obtain a Debt Management Plan: Debt Management Companies and DIY Approaches
There are two routes to obtaining a debt management plan, which is the best option will depend upon the confidence of the individual in negotiating with creditors, as well as the amount of time the individual is willing to invest in the debt solution.
- DIY Approach – If an individual is confident enough to negotiate with their creditors and has sufficient time to do so, then a do-it-yourself approach may be the best way of formulating a debt management plan. Here an individual will inform each of the creditors of the intention to formulate a debt management plan using a set of standardised forms and offer to make regular repayments over a specified number of years.
- Debt Management Companies – The more usual approach to obtaining a debt management plan is to approach a third party provider who will negotiate with creditors and handle both the debt management plan and the payments to be made to creditors. Whilst using a debt management company may be stress a relatively stress free solution to debt problems, debt management companies will make a charge for the services provided.
In summary, a debt management plan may be an appropriate alterative to bankruptcy, where an individual has multiple sources of debt but does not wish to enter into a legally binding debt solution, such as an IVA, administration order or debt relief order. However, one should consider that if a do-it-yourself approach is not taken, then debt management companies may charge significant fees, meaning that the total amount to be paid back will be more in the long term.