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How Does A Debt Management Plan Work? - The Process

According to the BBC, individuals in the UK owed a total of £1.43 trillion at the end of September 2013. Out of the owed amount, 158.6 billion was in the form of unsecured loans. Part of the reason that these figures are so high is because of the higher cost of living, which drives individuals to borrow to cover their bills. Nevertheless, the reality is that thousands of Britons are struggling to pay off their debts. Luckily, a debt management plan offers a workable solution to this problem. Using this tool, you can pay off your debts with relative ease. Here is some more information about a debt management plan, including how it works:

What is a Debt Management Plan (DMP)?

A DMP is a structured plan to help you pay off your debts. Each plan is personalised depending on each person's unique circumstances. Often it involves bringing in a third party to act as an intermediary between the debtor and the creditor. The third party can negotiate with the creditor on your behalf of the debtor for better repayment terms.

How to Set up A Debt Management Plan

Firstly, as the debtor, you must provide a list of your income, expenditure and debts. This will show how much disposable income you have, as well as how much you have left after taking care of your living expenses. From this, you can come up with a budget that will help you as you pay back your debt.

Secondly, you will have to negotiate with your creditors. It is important to note that, while you can approach your creditors individually and plead your case, it may be better to hire a third party to negotiate on your behalf. Such negotiations usually focus on convincing the creditor to accept lower monthly repayments. In some cases, you can ask for a reduction in interest rates or for a waiver of certain fees.

If your creditors agree to this arrangement, you will only need to make one low monthly payment towards your debt. If you have multiple creditors, this payment will be split amongst them. In case you involve a third party, you will send your monthly payments to the third party who in turn will send the payment to your creditor(s).

Who Needs A DMP?

DMPs are ideal for people who are struggling to make their monthly debt payments. In other words, people that can barely make ends meet, let alone put away some savings. However, DMPs are not for everyone. This tool can only be used when paying off unsecured debt, for example, credit card debt.

Benefits of a DMP

Firstly, if you have fallen behind on your debt payments, then calls from debt collections agencies become a norm. Once you get your creditors to agree to a DMP, the calls will reduce or stop altogether. This will mean less stress and less anxiety in your daily life. Secondly, with this plan, rather than making payments to multiple creditors, you make one payment per month. That one payment is split between the creditors. A DMP is not a debt consolidation program. However, it does allow you to pay off your debts in full. Thirdly, DMPs increase the possibility of paying lower interest rates and avoiding late fees. Approaching a creditor with a possible debt repayment plan demonstrates a willingness to pay off their debts. Most creditors will give concessions such as lowering interest rates or waiving late payment fees.

Fourthly, people will be able to pay off their debt in a shorter duration. In addition, a debt management plan helps you to get control of your finances.

In conclusion, while many people are struggling to pay off their debt, a debt management plan offers a viable solution to their situations. You will be able to pay off your debt in a shorter time and in more manageable payments. In addition, a DMP will generally cut down the stress and anxiety that comes with struggling with debt.

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