Debt Management Plans explained

You're in debt and you're worried. You've heard about Debt Management Plans, but what are they?

What is a Debt Manangement Plan?

You're in debt and you're getting threatening letters from creditors. You're also getting pestering phone calls from creditors who prefer to try and pin you down by tackling you directly. Not a good situation to be in.

Unless you are seriously heading for bankruptcy (because you, literally, do not have the means to meet your bills), you'll probably be looking at what's called a Debt Management Plan. This is an assessment of how much you can realistically afford to offer each of your creditors in order to pay off the money that you owe.

In practice, it means that you work out what your essential bills are – rent/mortgage, Council Tax, gas, electricity, food, etc – and you look at what you have left to pay off your debts. You can then distribute your 'leftovers' to your creditors.

How it works

In an ideal world, you would pay off the most expensive debt first while making minimum payments on the others. But you may not have enough spare money to do this. If you genuinely have to appeal to your creditors for some leeway – and if you've used our template letters to approach them – you will probably be asked to make 'pro-rata' payments.

All this means is that you distribute your spare cash fairly in proportion to what you owe. You can work out how to come up with proposed payments here.

Making payments

If you're using one of the debt management charities – such as StepChange Debt Charity, Citizens Advice or PayPlan – then you can just make a single monthly payment to them, all of which they distribute to your creditors on your behalf. The important thing is that, however your surplus cash is dished out, every penny of your monthly payment goes towards reducing your debts rather meeting interest payments.

What happens next

Bear in mind that, while you and your creditors may agree a Debt Management Plan that is designed to last for a few years, you should expect it to be reviewed every six months or so just in case your circumstances have changed. Unfortunately, it's just something you'll have to put up with. And, you never know, you may find that you just needed some temporary respite from your bills until you sorted yourself out. Ultimately, that's what Debt Management Plans are for.