What they don’t tell you about debt management plans
You’re buried in debt and inundated by final demands and letters threatening to take you to court. You’re overwhelmed and desperate. You search for ways to reduce debt, and debt consolidation solutions. You consider taking out a personal loan. You may even apply for one. But you’re over-extended, missing some payments, late with others, and your credit score is getting increasingly dire every month. By the time you reach the conclusion you need to consolidate your debts, you are in such a mess that taking out a personal loan, or opening a new credit account and transferring your balances, is no longer possible.
A debt management plan is a viable solution to this problem, allowing you to consolidate your debts in one place and make a single, affordable monthly payment towards clearing them. Your debt management company will handle all your creditors, get agreements in place, and ensure you are not charged any further fees or interest while you are repaying your debts. If you are able to make some larger payments, they can also arrange for you to pay off your debts at a reduced rate, saving you a tidy wedge of cash.
Sounds like a dream come true, but here’s what they don’t tell you:
1. Most debt management companies charge. While you are making a payment of £150 a month towards clearing your debts, £45 of that is going to the company, every single month. To avoid this hellish pitfall, use a debt management charity such as StepChange http://www.stepchange.org/, who will not charge you a penny for your plan.
2. The fact you have signed up to a debt management plan goes on your credit report and stays there for six full years. That’s six years from the date you make the final payment, not the date you take out the plan.
3. Every debt you pay off in full will be marked as ‘satisfied’ on your credit report, and will no longer count against you. However, any debts you settle at a reduced rate will be marked as ‘partially satisfied’, or ‘defaulted’. Every account with a PS or D status counts against you, and stays on your report for a full six years after you’ve made final payment. Paying in full may take you longer, but ultimately it may be worth it to get your credit report cleared quicker. Even if it takes you an extra year or two to pay off your debts, they will stop counting against you four or five years sooner.
4. The presence of a debt management plan and ‘partially satisfied’ or ‘defaulted’ accounts on your credit file will not only affect your ability to get credit for six years, but also your ability to rent properties and take out contracts on phones and other services. It may also be taken into account when calculating things like car insurance.
5. It is possible to do everything done by a debt management plan yourself. It takes time, patience, and the ability to hold your ground and endure the threats and demands of your creditors, but it can be done. The benefit is that your credit report will not show a debt management plan.
A debt management plan can be the solution to all your problems, but be wary. Ensure you know exactly what the long-term effects will be before you sign an agreement.