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A debt management plan is a method for someone who is struggling with unaffordable debts to restructure their monthly debt repayments into a single amount. Advice should be taken to make sure another debt solution is not more appropriate for your circumstances.

Affordability is worked out by creating an “income and expenditure” budget. Priority is placed upon essentials such as mortgage or rent, council tax, utility bills, transport and general housekeeping expenditure. Allowances are also made for all sorts of other areas of expenditure (for example car servicing, haircuts, reasonable leisure activities and home repairs) which can easily be forgotten. It is our advice that all expenditure areas are covered to make sure that the repayments that may be offered to creditors can be maintained.

The overall expenditure total is taken away from the income total to find out how much is left. This amount is often known as “disposable income” and is the amount that is normally offered to repay creditors via debt management plans.

The debt management advice company will then write to your creditors offering to repay the debts at this reduced rate. The amount offered is justified by providing the details of income and expenditure.

Each creditor is generally offered their fair share of the money available. The fair share is based on percentages and is known as a “pro rata” payment. For example if you owe 50% of your total debt to one credit card company this company will be offered 50% of your available payment.

You will then make this contribution each month to the debt management advice company and they will distribute the payments to your creditors.

You can direct any creditor contact received (e.g. letters) to the debt management plan advice company that you have employed so that they can deal with it.

Creditors do not have to accept debt management plans and legal recovery action remains a possibility. Some creditors may not agree to stop any further interest and charges. If interest is not frozen, repaying the debts over a longer period will lead to an increase to the total amount to be repaid.

Beverley Budsworth Phil Corfield Debt Management Plan Expert DMP Adviser
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