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Debt Management - Good or bad?

Debt Management is Still an Attractive Option for the Financially Distressed

In considering which financial solution might suit you best, why not take a little time out to get Debt Management Advice and consider how a Debt Management Plan might work for you? After all, going by the estimated numbers of people who opt to enter into a Debt Management Plan in the UK, it is one of the most popular solutions. I say estimated numbers because no official statistics are available for the numbers of persons in the UK who adopt this most flexible and most informal of processes to address their debt problems. However it is believed that a conservative estimate of people currently in a Debt Management Plan in the UK is 700,000 persons and it could be as high as one million. Let’s have a little look at the reasons behind this most extraordinary statistic and why it might work for you too.

Your creditors might be agreeable to a Debt Management Plan. While creditors would prefer debtors to honour the terms of their original contracts and repay their debts in full and on time they recognize that in the real world there will always be some borrowers who fall by the wayside and threaten to default. In such a scenario, creditors want to maximize the amount that they can get back and minimize the time that will take. A Debt Management Plan is a plan to repay all of the debt at a slower rate and over a longer period of time than originally contracted. Since the Debt Management Plan promises full repayment of the debt, it is distinctly a better solution than bankruptcy, from the point of view of the creditor, since in bankruptcy only a small amount of debt is usually repaid. A Debt Management Plan is even preferable to an Individual Voluntary Arrangement (IVA) where creditors usually recover less than half of the debt and sometimes much less.

You don’t have to be insolvent to enter a Debt Management Plan. Debt Management is really an informal process which operates extensively throughout the land without comprehensive legislation. Although your income and assets may be sufficient to pay off your debts in full in accordance with the terms of your contracts with your creditors you might be unwilling to carry out some of the necessary actions to achieve this. You might not want to sell your home, for example. By entering a Debt Management Plan you might be able to manage your finances in a more orderly way. If you decide that you should want to sell or re-mortgage your property, you can do it at a time that suits you or when the market is more favourable or when re-mortgage terms are more reasonable. To enter an IVA or become bankrupt on the other hand, you have to be insolvent.

While there are no guarantees, there is a good chance that you can keep the news of your Debt Management Plan from your neighbours, friends and family, assuming that they are not creditors of yours and provided that you behave discreetly. Commercial debt management service providers as well as CCCS, CAB and Payplan all offer complete confidentiality and privacy in their dealings with you and no information should be disclosed by them to any third parties such as your neighbours, friends, family or your employer. Only your creditors will be contacted and you will have to agree in advance before even that can happen. Normal practice is to authorize your Debt Management Plan service provider to contact your creditors and to negotiate with them on your behalf.

You can start off by entering into a Debt Management Plan for a limited period of time, exiting the Debt Management Plan when it suits you and then entering into an IVA if in fact you are insolvent. Why would you want to do this? One reason is that your current financial and personal circumstances could lack the stability needed for an IVA at present but that after a limited period that stability might be established. Alternatively your solvency status might not be clear initially but you feel that you will become insolvent in the foreseeable future. Or again, you might be undergoing divorce proceedings and there might be a lack of clarity relating to future income or in relation as to how the marital assets are to be divided. It might make sense for you in such circumstances to enter into a Debt Management Plan until the divorce and its settlement terms are finalized and then to enter into an IVA if the divorce should result in insolvency. Similarly, you might be made redundant and decide to become self-employed working, for example, as a taxi driver. Creditors would be likely to reject proposals for an IVA before any self employed trading history is established and thus a short duration Debt Management Plan might be the best initial course of action.

A Debt Management Plan might be the only solution available to you at present. In certain jurisdictions such as Ireland, a Debt Management Plan might be the only financial solution available to you. While bankruptcy is theoretically available as an option in Ireland, the cost of the process and the draconian sanctions attached to it make it an impractical route for personal insolvency. Only a handful of bankruptcies occur each year in Ireland although the Irish government is planning to make some amendments to the Bankruptcy Act 1988 during the current year to make it a more attractive option for insolvent persons. While the government funded Money Advice and Budgeting Service (MABS) does offer advice to debtors in Ireland, that organization is unlikely to be sufficiently resourced to manage debt management plans to the same extent as commercial Debt Management Plan providers.

Paddy Byrne 16/03/2011

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