Until the mid 1990s advice on debt issues was provided only by agencies working
within the not-for-profit sector, of which the Citizens Advice Bureau and
National Debtline were, and remain, the best known. However, the increased
number of consumers with debt problems has encouraged a whole new industry of
fee charging debt advice agencies.
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Fee charging debt advice agencies
Debt advice agencies offer a similar debt advice service to the Citizens Advice
Bureau but will also administer your reduced payments negotiated under a debt
management plan. Your local CAB will often arrange for you to make reduced
payments, but you will be responsible for making these payments. The fee
charging companies will also arrange that you pay your money over to them and
they will pass it on. However, this additional facility comes at a price – the
fee charging companies typically keep up to 15% of your regular payment as
their fee and the whole of your first month's payment may also be swallowed up
in administration costs.
Of course, paying somebody else to administer your payments means it takes
longer to repay your debts. There is therefore little point in paying for a
debt management company unless you think their service is worth it.
Advantages of debt management plans
-
Allows you to bring income and expenditure back into line without taking on
more borrowing;
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You can follow this option by yourself or with the help of a no fee charging
debt advice agency.
Disadvantages of debt management plans
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There is no guarantee that your creditors will accept the reduced payments
and/or freeze future interest payments;
-
The time taken to repay your debt will increase. The time will further increase
if you pay your debts through a fee-charging debt management company;
-
Your credit reference file will show details of the Debt Management Plan. This
will affect your ability to get credit in the future.
Debt management plans can be a good option if:
-
Your financial problems are caused by a temporary reduction in income and the
situation will improve in the near future.
Debt management plans can be unhelpful if:
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Your ability to pay your debts will not improve within 12 months.
Debt management plans can be disastrous if:
-
The fees taken by commercial debt management companies and the refusal of banks
and credit card companies to freeze interest means that your debt steadily
increases.
