Debt Management Explained
This is a repayment scheme administered by a debt management company for people unable to pay their creditors the full contractual payments.
Negotiating with creditors
Negotiating with creditors can be difficult and may take a long time. The arguments you use when you are negotiating will depend on a number of factors, such as whether you have both priority and non-priority debts, whether you have any assets you can sell, whether you have any available income, and whether your situation is likely to improve or not. Creditors will also want details of the income of your partner.
You need to be clear about what you want the creditors to agree to. You must be realistic about what you can offer - for example, if there is no prospect of you getting as job in the near future, you may only be able to offer very small amounts such as £1.00 a week, called 'token offers', to each of your non-priority creditors.
How much to offer
Priority creditors will generally be less flexible in what they will agree to than non-priority creditors, because they know they can take stronger legal action against you. You must remember that, when paying off priority debts, such as council tax or income tax, you will have to pay off the amount you are currently liable for, as well as putting something towards the arrears.
When you are working out what to offer to your non-priority creditors, try to divide up the money that you have available, according to the size of the debt. The bigger the debt, the bigger your offer of repayment should be. However, you can only do this if you have a reasonable amount of money available in your budget. If you do not have much money left after essential expenditure, you will have to make token offers to your non-priority creditors.
Advantages of using a DMC
The advantages of using a DMC are:
- Some people like the idea that they have a contract with the DMC, and believe that they therefore have more control over how their debts are treated.
- You will have almost instant access by phone to the DMC and will not have to wait to see someone.
- Some people like the anonymity of a telephone service run by a DMC.
- You do not have to do any work in relation to your debts, for example, drafting letters to creditors.
- There is only one payment to make - to the DMC - and the company distributes the money to the creditors.
Debt Management top tips for dealing with debt
- Don't panic. And don't ignore the problem, it won't go away.
- Don't take out any further credit - you'll only get yourself in worse trouble.
- Gather together all the documents you have about your debts and make a list of all the people you owe money to, how much you owe to each one and what type of debt it is (mortgage, council tax, fuel bill, overdraft, credit card, bank loan). You should do this for all your credit commitments, even if you're up-to-date with some accounts.
- Work out your most important debts - these are the ones where the creditor has a drastic sanction like repossession (mortgage arrears), cutting off your supply (gas or electricity bill) or imprisonment (council tax, child support). You need to agree repayments on these debts first before tackling your credit debts.
- Work out your total income from all sources (use either monthly or weekly figures - don't mix the two). You may be able to increase your income by checking you are paying the right amount of tax or claiming benefits. Seek advice from your local CAB if you would like us to check whether you are receiving all you are entitled to.
- Do the same for your essential expenditure. Don't include any repayments on your credit debts, but include the normal payments on your important debts.
- See if there is any way you can cut down on your expenditure, but don't underestimate the amount you spend on essential items like food and fuel. Find out whether you can spread payments for fuel and water bills by budget schemes where you spread the amount over the year. This may help you pay your bills more easily.
- Subtract your expenditure from your income - if you have any money left over, this can be split between your creditors. If you don't have any money left over, contact your local CAB for advice about what you can do next.
- Negotiate repayments on your most important debts, then split any remaining money between your credit debts. CAB advisers do this by working out repayments according to how much you owe each creditor. This is called pro-rata distribution.