The article concerns the following question – What Is A Debt Management Plan? In the past decade the UK consumer debt problem has increased dramatically. Throughout the ‘boom’ time of the early 2000′s it was very easy to get hold of credit facilities.
This might take the form of secured borrowings like mortgage borrowings at 90%, 100% and even 110% of the value of the property, or unsecured credit like credit cards. The simple fact was that getting credit was a relatively simple task.
The decade also saw the rise of store cards, which are credit cards belonging to a particular brand or retail outlet. At every transaction stores would ask you if you would like to accept an offer to get a store card. Often a £50 purchase might lead to the acceptance of a £500 store card and this then meant that £450 further products could be purchased on credit. It was that simple. Store cards often came at particularly high borrowing rates.
The next short term gift to the client was that they only had to make minimum payments that were extraordinarily low. In many cases these payments often barely covered the month interest payment so the repayment of the actual credit was rarely paid down.
When the housing market crashed in 2008 it meant that a lot of people were left with negative equity on their properties. Credit was much harder to come by. The problem was that people had a lifestyle that had been accommodated by the free and easy credit lines.
All of a sudden an individual had problems with making repayments to pay down the liability.
A debt management plan
A debt management plan is typically a strategy whereby an individual lists the amount of liabilities owed to each type of credit institution. For each of these borrowings there will be a minimum monthly payment also.
In an individual’s financial circumstances there will tend to be a level of disposable income. This will consist of the total monthly income less the monthly outgoings to live through that month. The balancing amount will be the individual’s disposable income.
A debt management plan would take this disposable income and pro rata it across the levels of liabilities.
Each creditor is then approached to take a smaller affordable monthly amount that the customer can afford to maintain regular payments to creditors whilst also reducing the liability. In many cases the creditor is asked to freeze interest so the payments are actually a payment towards repayment of debt as oppose to a payment of interest.