If you are finding it difficult to pay back debt, you may find it easier to set up a debt management plan; one of the most commonly used ways to reduce debt. When setting up a debt management plan, your will need to negotiate with your creditors, an amount of money you can pay back each month, that is affordable for you.
One of the main advantages of a debt management plan compared to alternative options for managing debt, is unlike a formal legal contract, it is more of a relaxed arrangement between you and your creditors that could be cancelled by either party at any time.
Affordable payments to reduce your debt
A debt management plan defines how much you can afford to pay off each month, which could be less than you originally imagined, in return making you feel like a huge weight of stress has been lifted off your life.
Initially when setting up a debt management plan, you would need to work out your monthly disposable income, this can be worked out by deducting your monthly living expenses from your total monthly income.
Monthly disposable income = total monthly income – monthly living expenses.
Your monthly disposable income is how much you can afford to pay back to your creditors towards your debt. To ensure your disposable income amount is as accurate as possible, it is important not to overlook any expenses and to ensure all expenses are reasonable for your creditors to approve.
Realistic living expenses
When setting up your affordable monthly payments, your creditors will need to see a copy of your budgets for your total monthly income and living expenses; this will guarantee them you are committed to paying back the stated amount each month. In the case your creditor disputed your living expenses, this would not stop you from commencing your debt management plan, but they might not hold the extra interest that was payable.
Reaching a deal with your creditors
If you have more than one creditor that you owe money, you will need to split the total monthly disposable income between each creditor, e.g. if there are 2 creditors, it would be 50% each. You are able to speak to your creditors direct to negotiate the amount you will be paying back, and therefore start your own debt management plan. A significant amount of effort is required when negotiating with creditors.
You will need to be highly organised to ensure each monthly payment is made on time to each creditor, and for your debt management plan to make you become debt free. Often individuals would prefer a third party to organise the negotiations and setting up of a debt management plan.
Using a third party to open a debt management plan
The market is full of debt management companies that specialise in helping their customers to start a debt management plan. These companies can do all the work for you and build a relationship with your creditors to not only negotiate the monthly payment amounts, but also taking the responsibility for getting the payments from you to your creditor(s). Whilst most commercial companies charge to do all of this, many will offer advise and set up a debt management plan for free.
Although there are advantages and disadvantages for using free or charging companies, overall debt management plans are very flexible in allowing individuals to transfer from one company to another, if for example you felt they were not working hard enough to help you reduce your debt, e.g. negotiating an interest freeze with creditors.
Important facts to note after starting a debt management plan
Some creditors may agree to freeze their interest and charges on debt, whereas others may not. If you are showing a good record of making payments each month, then creditors may agree to hold any future charges or interest rates. Negotiating an interest freeze with creditors may not always be easy, and for this reason a third party could help with this.
You must check your statements each month, to check interest charges are being held or reduced. If this is not the case, then your debt balance will not reduce each month and it will take you longer to reduce your debt.
You will need to get in touch immediately with your creditor or third party, debt management company to reinforce that interest or any other charges are being held or reduced.
Continue – Debt Management Plan Or Debt Management Program