Proper financial management is an important matter in our lives if we are to live with stability and security. But we know only too well how easy it is to get into debt, especially nowadays when the economy isn’t performing very well. When people’s debts start becoming unmanageable, they grab the first quick fix that comes their way. This is where a debt management company usually comes in.
Definition and Procedures
Debt management companies or DMCs transact with your creditors on your behalf. They will negotiate with these creditors over issues such as reducing your monthly payments and possibly putting a freeze on interest. You pay one amount to the DMC and they split this amount amongst your creditors accordingly.
The thing about debt management companies is that they tend to charge hefty fees for their services. Some companies take up to the first three months of payment upright plus charge between £25 to £30 per month thereafter. This means less money is devoted to the actual payment of your debts and as a consequence, it takes you longer to pay off these obligations.
Disadvantages
Apart from the cost, there are other disadvantages associated with DMCs. To start with, a lot of these companies are willing to deal with non-priority debts only so you can have your credit card bills, utilities and unsecured loans taken care of but not, for instance, your mortgage payments.
A debt management plan doesn’t provide you with protection against legal action. Even though a debt management company has negotiated terms with your lenders, they may still opt to file a suit against you.
Debt management companies also have a preference for the customers that they deal with. If you do not possess sufficient disposable income or do not own the home you are living in, you will not be taken in as a client. Your home will be used as a guarantee in case of default.
What to Do
There are organizations that offer debt management advice free of charge. Organizations such as the CCCS will draw up a debt management programme for you without asking for a fee so you can direct your queries and other concerns to them.
If you are determined to use a debt management company to help you out with your problems, make sure you are fully aware of what the service includes. It is vital that you read through the agreement so you can check for any additional fees that you will be charged with. Also, check with the Financial Services Authority or Office of Fair Trading if the company you are dealing with is duly registered with them. It is best to choose a company that is regulated by such organizations so you know they operate within the boundaries of the law.
Although your repayments will be managed by the DMC, remember that you still have control over how much in monthly payments you can pay. There are companies who recommend payment plans that require you to pay £10 or less per month but this also means you will be shackled with debt obligations for a longer period.
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