Why should I use a DEBT MANAGEMENT COMPANY to help with my debt problems?
A debt management company (DMC) can offer a service to act as an intermediary for borrowers and the lenders that they owe money to. A debt management company will contact the lenders on behalf of the borrower to renegotiate the terms of existing credit agreements, usually when the borrower is unable to meet their normal monthly repayments.
This will include asking the lenders to accept lower monthly payments and possibly freezing any interest payments and stopping any charges (like late payment fees etc). A borrower can find they need the services of a debt management company when they have a reduced income, possibly because of redundancy, illness, divorce or separation.
There are two different kinds of debt management companies out there to help you:
Commercial companies that will charge you a fee for services
- Debt charities that will charge the lenders to negotiate on your behalf
1. Commercial debt management companies
This type of company will charge you on a monthly basis for administering your account, collecting your payments and distributing the money to your creditors. This fee is deducted from your monthly payment. There is also normally a fee payable for negotiating with your creditors to accept the reduced payments and stopping any interest or charges. The first couple of repayments usually cover this fee.
2. Debt charities
A debt charity will help in exactly the same way as a commercial company, however they work in conjunction with, and are funded by, your creditors. This means that the charity has to work within strict guidelines set out by the creditors regarding what is acceptable to them for your living expenses. Customers often complain that they are not left with enough money to survive month to month. The unrealistic expectations of the creditors can lead to the failure of the debt management plan.
It is also worth remembering that a charitable organisation can take up to 2 months, depending on case workloads, just to set up an appointment to discuss your debt problems. This is often far too long for most people to wait, especially when they have lenders breathing down their necks, receiving debt reminders & final demands, getting phone calls at all times of the day and even answering the door to bailiffs. A commercial company will often make contact with you on the same day you make your enquiry.
The main advantage however, is that all of your monthly payment goes to repaying your debts. This will reduce the overall length of your debt management plan because you are paying a fraction more every month.
Which type of debt management company would be best to help me?
A lot of people will also assume that using a charity to help with their debt problems will increase the chance of having their debt management plan agreed. However, it makes no difference whether you decide to use a fee charging company or not because it is up to each lender whether they will stop charging interest to your accounts or accept reduced monthly payments.
A fee charging company will usually have more resources and staff to hassle your creditors into accepting lower payments and freezing interest on your behalf. You need to be able to act as quickly as possible to stop your debt problem spiralling out of control.
One factor to always remember is that a debt management plan is an informal arrangement with your lenders. This means your creditors could still hassle you on the phone or by letter. They could take legal action against you to recover their debt at any time, even if you have been keeping up with your plan’s repayments. This fact remains regardless of the kind of firm you work with.
So, which type of debt management company should you use? At the end of the day it is a personal decision, which only you can make. A professional company may be able to act immediately and have more success negotiating on your behalf but using a ‘non fee-charging’ firm means more of your monthly payments go into repaying your debt.
Whatever decision you do make, please don’t continue to use credit cards, store cards or overdrafts to build up your debt. This will just lead to your problem spiralling out of control and could jeopardise your current debt management plan.
As with any business agreement, if your circumstances change during the time you are in your plan you should contact your debt management company immediately. If you are unable to make your monthly repayments for any reason, such as redundancy, illness, divorce or separation, they will need to know ASAP so they can get back in touch with your creditors to try and re-negotiate a new deal for you.