Posted on November - 26 - 2010
Advantages and disadvantages of debt management
If you’re struggling with your unsecured debts, a debt management plan may be able to help.
In short, debt management is an informal financial agreement between you and your unsecured creditors – in which your creditors are asked to accept reduced payments to help you clear your debts.
As with all debt solutions, a debt management plan, such as those from First Debt Management, has its advantages and disadvantages – and we’re going to take a look at some of these now.
Advantages
A debt management plan could:
Lower the size of your monthly payments. If you can’t afford your payments, your unsecured creditors may agree to accept smaller ones – leaving you with enough money for your essential expenses each month.
Freeze interest/charges. Your creditors don’t have to agree to this, but they may well freeze interest on your debts while you repay them.
Make your finances easier to manage. Many people ask a professional debt management company to deal with their debts on their behalf. You can do this too, and it’ll mean you just end up making your monthly payment to that company who will then distribute the money amongst creditors.
Disadvantages
A debt management plan:
Isn’t legally binding. It’s up to each of your lenders whether they agree to the proposed changes in the way you are repaying your debt. If they believe a debt management plan is the best way for you to repay the money you owe, they’re likely to agree. Once the agreement is underway, however, creditors are free to change their minds if they feel it isn’t working out, and you are free to withdraw from the agreement if you feel it isn’t right for you.
Can have an impact on your credit score. Paying your debts back at a slower rate means you’re not actually sticking to the original agreement. As a result, lenders may issue a default notice. This will show up on your credit rating.
Can increase the amount you repay. If your creditors don’t agree to freeze interest on your debts, and you agree to repay them more slowly – you’ll pay more in interest.
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