Is it worth being in debt to a debt management company?

Mike explores both sides of the argument and leaves it to you to decide.

What do Debt Management Companies, DMCs, actually do?

They offer a service whereby they act as a go-between for someone who owes money (often referred to as the debtor) and the lenders (known as creditors) that the debtor owes money to.

The DMC makes contact with the creditors on behalf of the debtor and then draws up a contract between the debtor and his or her creditors.

Once the contract is ready the debtor pays the DMC one monthly payment, they in turn distribute that payment to the creditors. There is a charge for this no matter what DMC you use, I explain this in more detail below.

How do these firms get paid?

There are simply two types of DMC's -

• Firms that will charge you
• Firms that will charge the creditors instead

Firms that will charge you

These firms will charge you every time they distribute a payment to your creditors; usually around 15% plus vat which equates to 17.63% of your monthly payment. For example, you pay £200 per month to the DMC, the firm will take £35.35 for professional fees, therefore your creditors will receive pro rata payments of the remaining £164.75.

There are some firms that will ask for the first three months payment from you in advance before they actually distribute any money to your creditors. Stay away from any such firm that requests this. There are numerous other professional firms that will do the same job but with no up front payment.

Firms that will not charge you

These types of firms offer exactly the same service as above, however the criticism is that they work in conjunction with the creditors and are funded by the creditors.

The impact of this is that the creditors have set specific guidelines to these firms of what they will accept for expenditure budgets such as housekeeping, mobile phone costs, hairdressing expenses etc: Some clients come to me saying that they have not been given enough money to live on, the expenditure is not realistic and they end up not completing the plan.

On the plus side 100% of your monthly payment will go towards your creditors and in return the creditors give the firm a commission similar to what the professional firms charge, 15%. This will reduce the time period of any plan that you have because you are actually paying that little bit more each month.

Important note

It does not matter which firm you use as it is up to each individual creditor whether they wish to stop applying interest and charges to a debtor's account.

Due to the current debt crisis in the UK the fee charging firms have seen a massive increase in demand for their services because the non fee charging firms, of which there are only two, are extremely busy and can take longer to set up these plans. Debtors need action sooner rather than later and many accept that they have to pay for such a service.

Pros and Cons

There are three main advantages for using a DMC:

Advantages

• The borrower does not get involved in negotiations with their creditors.
• Only one monthly payment to the DMC - borrower feels the debt is under control.
• The monthly payment is affordable

Disadvantages

• The debtor is not always informed of other alternatives to solving their debt problem.
• Some firms will charge a set-up fee as well as a monthly administration charge.
• The majority of DMC's are only interested in non-priority, unsecured debts.
• Debts may increase due to the additional fees and creditors' reluctance to freeze interest and associated charges.
• Creditors can refuse your offer and not deal directly with the DMC.
• Any rescheduling of debts will most definitely affect the borrower's credit rating.
• Creditors are not bound by the arrangement and can take legal action to recover their losses.

If you are making a low monthly payment in comparison to your level of debt in the plan then the debt can increase and take a lot longer to clear.

Example when not to use a DMC

• If the repayment period is unrealistic due to the high level of debts and an Individual Voluntary Arrangement, IVA, would reduce the term down to 60 months.

• If creditors refuse to freeze interest and stop associated charges whereby the level of debt is increasing.

Example when to use a DMC

• They can be useful when no other option is available or when a temporary solution is required until someone is able to sort out their finances for example to arrange a full and final settlement such as a consolidation loan or an IVA.

• Although there are exceptions to this most debt management plans do not necessarily end up resolving the debt situation.

Can debtwizard help decide if Bankruptcy, an IVA or Debt Management Plan is right for me?

Yes. Debtwizard can help you set up either no-fees debt management plans or professional fee-taking debt management plans with one of our panel of preferred providers.

To talk to an advisor to find out what other options are available then telephone our team on 0845 225 0025 or complete the rapid response form on the website www.debtwizard.com

Word of caution

Whatever solution you choose be careful not to continue to build up debt through continued use of credit cards, store cards and overdrafts. Otherwise your debt problem will increase and this could jeopardise your current arrangement.