Debt Management Plan - Advantages and Disadvantages

Looking for a debt free plan to get personal finances back under control? Find out the pros and cons of getting out of debt with a debt management plan.

When expenditure exceeds income, urgent action needs to be taken to get out of credit card debt. A debt relief program, such as a debt management plan, provides a way to put lots of small unsecured debts under one roof and make a single payment to an intermediary. They distribute the proceeds to creditors on a pro rata basis. The repayments will continue until the balance is completely cleared.

Advantages of a Debt Management Plan

• Managing debt. Rather than trying to make payments to multiple creditors, it is only necessary to make a single payment. This is then distributed to creditors on a pro rata basis.
• Further charges. Although there is no legal obligation to do so, most creditors will freeze further interest and charges to make paying off debt a bit easier.
• Avoid bankruptcy. Unlike bankruptcy, a debt management plan is not made public in a local paper.
• Prevent creditor contact. Provided that the repayments are made punctually each month, most creditors will be satisfied with this arrangement.
• Flexibility. The terms of the arrangement can be modified to suit personal circumstances.
• Peace-of-mind. Managing debt with a debt relief program helps to balance the books. This helps to reduce any stress, worry and anxiety suffered by the debtor.

Disadvantages of a Debt Management Plan

• Monthly payment. In order to get out of credit card debt, it is necessary to make a monthly repayment until the balance is paid off. If payment stops, creditors will start calling again. A sudden change of personal circumstances could jeopardise the arrangement.
• Management charges. About 15% of each payment will be taken to cover the cost of administering this debt free plan. Some of the less effective debt management companies front-load charges.
• No debt write-off. Unlike a debt settlement program, none of the principal will be eliminated. It is necessary to pay back the full amount of money of money that is owed.
• Voluntary agreement. Unlike filing for bankruptcy, a debt management plan isn't legally binding. This means that it can be canceled by the debtor or creditor at any time.
• Acceptance. The agreement must be accepted by all creditors or it cannot go ahead.
• Secured debts. Not all personal debt can be included in the arrangement. For example, a mortgage or car loan. Any secured loans will need to be paid separately.
• Low credit score. Failure to comply with the terms and conditions of a credit agreement will be reported to credit reference agencies. This will make it far harder to get credit in the future. In practice, most clients have defaulted long before entering this arrangement.

Managing Debt with an Alternative Debt Free Plan

A debt management plan is an appropriate way to get out of credit card debt when the amount owed is relatively low. It is a particularly effective way to manage debt when there are lots of small creditors. A debt relief program, such as filing for chapter 7 bankruptcy or a debt settlement program, provides a means of negotiating serious debt problems. It is important to seek advice from a credit counseling service before proceeding with any debt free solution in order to ascertain the pros and cons.

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