How to choose a debt management company

Industry watchdog, the Office of Fair Trading (OFT), has taken action against 13 companies which set up repayment plans for people struggling with debt. It stated that the businesses were deliberately misleading customers by using website addresses similar to those of non-profit organisations when they are in fact commercial enterprises. A total of 27 websites have been shut down.

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Despite this clampdown, fee-charging debt management companies are nothing new. Indeed there are countless companies advertising online which will organise repayment plans for you, usually for a fee, and as long as they have a consumer credit licence and adhere to the OFT’s debt management guidance they have every right to do so – and it can be a fee worth paying.

However, with unemployment on the up an increasing number of people are likely to need financial help this year, so it’s more important than ever to find a company you can trust.

We’ll look at what debt management companies are, how they work and the questions you should ask before agreeing to an arrangement.

What is a debt management plan?

Traditionally, debt management plans were set up by county courts after a finance company or lender appeals to have their money reclaimed. If the borrower is in genuine difficulty, the court can order repayments based on their ability to repay – listing debts in priority order with 'essentials' first such as house repayments and utility bills. The court sets aside a reasonable amount to cover the borrower’s 'essentials' such as food and clothes, and then makes a repayment order based on the amount owed.

However, with debt problems mounting, more people are setting up their own debt management plans without court assistance. These work in the same way as a court arrangement but involve customers taking the lead by approaching creditors with a detailed income/expenditure schedule, showing how much ‘spare’ money is leftover after priority payments are made and negotiating a fair distribution of this cash. It is also normal for a freeze on interest payments to be negotiated.

Even though lenders have become more willing to listen to borrowers’ difficulties since the onset of the credit crunch, few of us relish the thought of dealing with creditors ourselves. This is where debt management companies come in as they negotiate reduced repayments on the borrower’s behalf.

What are debt management companies?

Broadly, there are two types of debt companies – charitable services that offer free advice and debt management companies that charge a fee.

The likes of the Citizens Advice Bureau (CAB), National Debtline and the Consumer Credit Counselling Service (CCCS) give you the opportunity to have a one-on-one session with someone paid to help you rather than make money from you. They use a variety of techniques and can help you organise a debt management plan.

These services should not be confused with companies offering ‘free help’ as many commercial companies claim to be free but have other ways of charging you. Remember you should never pay for advice and there is nothing to stop you shopping around – so even if you obtain free advice from one company you could still use another.

Unfortunately, many of the free advice agencies are facing significant backlogs as debt problems mount, with CAB claiming to deal with an average of 7,241 new debt problems every working day and people in some areas having to wait up to three weeks for an interview.

By contrast, fee-charging debt management companies can often deal with problems quickly and the advantage they offer is that they administer payments for you – you pay your money over to them and they pass it on to your creditors. You will be charged a fee for this service – typically in the region of 15% of your regular payment. However, some debt management companies may be able to negotiate better terms with your creditors which could mean the fee is worth it.

Key things to consider:

-Is the advice you are receiving truly free?

-How much help do you need?

-Are you happy to administer payments yourself?

-Is it worthwhile paying a fee?

How can you find the right debt management company?

There are several factors to consider when choosing a debt management company including:

How quickly can you repay the debt?: Many plans may only make minimal contributions in the region of £1 a month which may seem an attractive option. But this could equate to a lifetime of debt so you should always try and repay the maximum per creditor contribution that you can afford – the higher this is, the quicker you will be debt free.

How much are you charged?: Most companies typically charge around 15% of your repayments. There can also be administration costs to pay which could swallow your first month’s repayment. Fees should only be set up once the debt management plan has been agreed – you should never pay ‘up front’ for advice.

What do you get for your money?: Find out exactly what you are getting for the fee – will the company administer payments for you? Will you have a dedicated account manager who is on hand if you have any queries? Can you refer any issues with your creditors to this account manager? Will you be assisted throughout the term of your plan?

Is the company regulated?: Does the debt management company conform to the guidelines of the OFT? If you have concerns, check out the companies and websites on the OFT consumer credit register.

What companies are out there?

Our debt section has listings for several debt management companies including Think Money, Debt Release Direct and the Debt Advisory Line.

The key when choosing a debt management company is to think about the service available rather than simply which company is the cheapest. The service is much like that of an accountant or solicitor so you should shop around to find one that is most able to address your needs.

Is there anything else to consider?

Remember that taking out a debt management plan will affect your ability to get credit in the future as it will be referenced on your credit profile. Consequently you should not enter into a debt management plan lightly – see if you could get around your debt problems with some better budgeting first, or by increasing your income and lowering your outgoings.

Debt management plans are a good option if your financial problems are temporary and the situation is likely to improve in the near future. They can be more difficult if your ability to repay your debts will not improve within 12 months. Remember too that there is no guarantee your creditors will accept the reduced payments in which case you may still face court action.

If you’d like more information on additional options, check out our debt guides. You can also check out Clare Francis’ interviews with Julie Griffiths from Citizens Advice.

Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.

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