The government is currently consulting on the possible regulation of, or introduction of a code of conduct for, debt management companies.
In the meantime, moneysupermarket.com has changed its debt channel so that only companies registered with the Debt Managers Standards Association (DEMSA) - the only debt management association approved by the Office of Fair Trading - such as Think Money, Easier Debt and Chiltern, are listed on the site.
Tim Moss, head of loans and debt at moneysupermarket.com, said: "We are extremely proud of this move. For a long time we have been looking at ways to protect consumers from the deeply unethical practices that are freely allowed and frequently followed in the debt management industry.
"We have heard many horror stories of debt management companies on our forums, including some taking up to six payments from a customer before even contacting the customer's creditors. But there are some debt management companies who provide a genuinely positive service to those struggling with debt, and we intend to highlight only these to our customers."
If you're struggling to manage your debts and feel you can no longer cope on your own, it's important to speak to someone who will give you balanced advice and recommend the route forward that is most suitable for your needs.
Debt management plans
Over the past few weeks we've looked at the various options available to those in debt: bankruptcy, debt relief orders and IVAs.
This week we look at debt management plans (DMPs).
What is a DMP?
A DMP is basically an agreement, usually set up by a debt adviser, between you and your creditors.
They can be set up on your request through a debt management company or charity such as the Consumer Credit Counselling Service or Citizen's Advice Bureau, or as a result of a bank or other lender's appeal for the return of its money.
The adviser or counsellor dealing with your case will calculate the amount you can afford to pay each month after necessary expenses such as mortgage repayments, council tax bills and day-to-day living costs.
Rather than you having to pay each firm you owe money to, you will send a single payment to the company or charity managing your DMP and it will then distribute the agreed amount among your creditors.
If you opt to have your DMP run by a fee-charging adviser, the ongoing charges will usually be set at around 15% of your monthly payment, while the administration costs could take up the whole of your initial payment.
Why should I take out a DMP?
One of the worst things about being in a debt spiral is the way that creditors hound you for money you do not have.
Once you are registered in a DMP, however, all calls and letters from the creditors should stop immediately.
The other huge advantage of signing up to a DMP sooner rather than later is that the interest charges on your debts will be frozen, meaning they will stop spiralling out of control.
How is a DMP different to an Individual Voluntary Arrangement (IVA)?
With a DMP, you are undertaking to pay off your debts in full - albeit generally more slowly than you would have under the original borrowing terms. An IVA, on the other hand, will often involve waiving a percentage of your debts because you are unlikely to be able to pay them off within a reasonable timeframe.
This is why IVAs are often recommended to those with large debts. You must, for example, have unsecured debts of at least £12,000 to take out an IVA.
An IVA is not just an easy way to get out of paying back some of the cash you have borrowed, though.
IVAs last for five years, during which time you will have to make fixed monthly payments and the IVA will be noted on your credit report, making it unlikely that you will be accepted for credit.
Even after the five-year term has come to an end, you will find it hard to borrow again at a reasonable rate of interest.
With a DMP, however, the fact that you have cleared all the debts built up with regular payments will count in your favour.
How will a DMP affect my credit score?
Many creditors will list the fact that you are paying off your debts through a DMP on your credit file. However, this still looks better than falling behind repeatedly with payments and your credit score will begin to improve if you keep up with the payments agreed.
If you have to take out a DMP, you are unlikely to qualify for market-leading deals such as the Halifax All in One credit card at 0% for nine months on balance transfers and purchases or an Alliance & Leicester personal loan at 8.7%.
However, you may qualify for middle-of-the-road deals such as Ocean Finance's homeowner loans at around 10.2%.
If you are keen to rebuild your creditworthiness, you can also apply for a low credit score card such as Vanquis Visa, which has a typical rate of 39.9%. This will only work if you pay off the full balance every month, though.
Please note: Any rates or deals mentioned in this article were available at the time of writing. Companies or products underlined can be applied for directly.
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