Decide if a Debt Management Plan is Appropriate
Whether or not Debt Management is appropriate for you will depend on how it will affect you and how successfully it will help you get out of debt. You need to consider things like how much you will have to pay into a Debt Management Plan (DMP), how long the plan will last and how your house and credit rating will be affected.
To help you make your decision about whether a DMP is suitable you first need to analyse your financial situation. You will then be able to see how a DMP will work for you. You do this by completing a statement of affairs. This is simply a summary of your financial position. It includes information about your monthly income and expenses. It also includes a list of your unsecured creditors and details about your key assets.
How to complete a Statement of Affairs
Your income and Expenditure Budget
The cornerstone of your Statement of Affairs is an income and expenditure budget. This will help you understand how much money you have left over each month which can be used to pay your debt. This amount is known as your disposable or surplus income.
When considering your income you need to add together all the money you receive each month. This will include your wages (after tax) and any benefits you receive. If you receive any other forms of income such as a pension or a contribution from other members of your household you should include this as well.
Your living expenses budget must include everything that you need to live on each month. You will need to include all your priority payments such as your mortgage, Council tax and utility bills. you also need to include a budget for food and transport costs. The easiest way to complete a living expenses budget is to follow a guide.
Your list of Creditors and Assets
Your Statement of Affairs also needs to include a list of your unsecured creditors and what you owe to each of them. Your unsecured creditors are debts like credit cards, bank loans, catalogues and payday loans. You do not include the minimum monthly payments towards these debts in your living expenses budget.
DM4U Tip: Secured debts such as your mortgage or a car HP are not included in your list of creditors. Secured debts cannot be included in Debt Management. You must continue to pay these and need to make sure you have allowed enough to maintain these payments in your living expenses budget.
You should also list your key assets like your home and car. Doing this will remind you to consider how a Debt management Plan will affect these things.
How much will your Debt Management Payments be?
Once you have completed your Statement of Affairs you are now in a position to better understand if Debt Management is appropriate for you. The first thing you need to know is how much you will have to pay into your Debt management Plan. You payment is based on your surplus income. This is your total monthly income less your total monthly living expenses as calculated in your Statement of Affairs.
Normally your creditors will expect you to pay all of your surplus income into your Plan. This is why it is so important to ensure that you have got your living expenses budget right. If you have missed out some expenses your surplus income will be artificially high and you might end up offering more than you can afford.
DM4U Tip: Paying off debt using a Debt Management Plan can often take a long time. You should estimate how long your DMP will last by dividing the total of your unsecured debts by the monthly payment you can afford. This will give you a total in months. You then divide this by 12 to get a total in years. You need to make sure you are happy with these time scales.
What happens to assets like your House in a Debt Management Plan?
One of the advantages of a Debt Management Plan for home owners is that your property is not involved. You cannot be forced to sell your home or raise money out of the equity to put towards your debt payments if you do not want to. This may be a compelling reason why you decide to use a DMP.
Having said that raising a cash lump sum by re-mortgaging can help you pay off your debt early. It is often possible to settle the debt you owe for as little as 50% of the outstanding balance if you can offer this amount as a one off cash sum. As such making the decision to release equity from your property could help you pay off your unsecured debts much faster.
DM4U Tip: If you are a home owner you need to be aware that a DMP does not give you any legal protection from your creditors. Even if you maintain monthly payments towards your debts they still have the right to apply for a County Court Judgment (CCJ) against you and a Charging Order against your property.
How will your credit rating be affected by a Debt Management Plan?
If you start a Debt Management Plan it is important to understand that this will seriously affect your credit rating. If you are offering to pay as much as you can afford it is likely that your creditors will accept your offers and may even stop their interest charges.
However creditors will still record the fact that you are making reduced payments on your credit file. They may also issue default notices against you. This will mean that your credit rating will become poor and you will find it difficult to take new credit agreements.
You should not start a DMP because you think it will help to protect your credit rating. This is not the case. Starting the Plan will affect your credit rating in the same way as any other debt solution. Generally speaking you should chose a debt solution which is right for you in terms of how well it will get you out of debt. Not for whether or not it will affect your credit rating.
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