Is Debt Management Right for You?
With ever-increasing numbers of people facing serious debt problems, debt management is being more and more widely promoted as a way to deal with unsupportable debts. But what exactly is it, and is it a good idea?
About Debt Management
The basic idea behind debt management is to relieve the daily strain of trying to keep up with debt repayments by authorising a third party to take over the servicing of your debts on your behalf. That third party is usually a private company, but can also be a charity or even a friend or family member.
At the most basic level, having someone else deal dispassionately with your creditors can be a huge weight off your mind, but a debt management program will go much further than that. For a start, you'll no longer have to keep track of your repayments - you now make one single payment to your debt counsellor who will distribute the money to your various creditors.
Your debt manager will contact your creditors and explain that you're having difficulty meeting your repayments, and try to negotiate a new more affordable repayment schedule. This can be done by extending the term of your debt, so that although you'll be paying them off for longer, your monthly repayments will fall. It may also be possible to get the interest charges on your debt frozen, so that all the repayments you make will go directly towards clearing the debt.
In some cases, you may even be able to have the interest charges wiped out retrospectively, reducing the amount of money you owe at a stroke.
Too good to be true?
This all sounds good, and the adverts you'll see for management companies can be very tempting, promising to slash your repayments and yet still wipe out your debt within a matter of years. But is it that simple?
If you enter a debt management program, and manage to renogiate your repayments, you'll be breaking the terms of the original credit agreements that you signed, and this will have a serious affect on your credit rating. This would be a concern if your debt is fairly small and your credit rating was previously good. If, however, your debt problems have become so severe that you're seriously considering management as a solution, then it's likely that you've already run up arrears or defaults and your credit rating will already be fairly poor.
Also, if you use a management company to run your program, as is usually the case, then you'll have to pay for the service. How much the fee will be will vary from company to company, so make sure you shop around to get the lowest possible charge. There are some unscrupulous companies out there who will take advantage of people in desperate situations, so don't make your situation even worse by signing up with a 'cowboy' company.
Summary
Debt Management can be an effective solution for people with serious debt problems, but it isn't without its drawbacks. Be sure to carefully consider the benefits and drawbacks listed below before making your decision.
The Benefits:
- Replace many repayments with just one, making it much easier to keep on top of your debt
- Reduce or even cancel your interest charges
- You no longer have to deal directly with your creditors
The Drawbacks:
- You'll be breaking the terms of your credit agreements, which will have an impact on your credit rating and harm your ability to get finance in the future
- You will usually have to pay a management company for the service, when money is already tight
- Beware of companies charging high fees
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