Being in debt can seem like a terrifying situation and so many people find it hard to face up to their money problems. They believe there’s no solution for them, apart from maybe bankruptcy, which is a scary thought in itself. Thankfully, there are several ways out of debt that don’t involve such drastic measures, but you’ll need to talk to debt management advisers to find your best option.
Two of the most popular and effective solutions for debt problems are the debt management plan and the debt relief order. They’re different, so they suit different people and circumstances.
How do debt management plans work?
Debt management plans (or DMPs) are great for those who can’t manage their unsecured debt repayments but who can make reasonable payments every month and pay off the debt in a reasonable time period.
A DMP is, in essence, a new agreement between the debtor and their creditors. The new agreement asks for smaller repayments each month. These payments will be manageable, but the debt will take longer to be paid off.
Creditors don’t have to accept a DMP, but most will agree to one because it’s a sensible way to get the money back from a well-meaning borrower who’s having difficulties. Eventually the amount is paid off in full and no-one has to get into expensive, stressful and lengthy legal action.
If you have a DMP, you have to make your payment each month until you’re paid-up. If, while you’re on the DMP, your financial situation improves, then you should arrange to pay more each month so your debt’s cleared faster.
The downside of a DMP
You’re paying off your debt more slowly than you originally agreed to and this will affect your credit rating for six years, even if you’re on a mutually-agreed DMP.
You might also end up paying more in interest due to the longer timeframe. There may also be extra charges incurred and while many lenders will waive the interest and charges, it’s not obligatory.
More about debt relief orders
A debt relief order, or DRO, is for someone who needs more help than a DMP can offer. These arrangements work best for people who can’t make reasonable payments on their debts and who can’t repay them in a reasonable timeframe.
DROs are a form of insolvency and anyone with a DRO doesn’t have to repay any money unless their finances improve within a year. Both debtor and creditor accept that there’s no sensible or realistic way the debtor can repay the money, so it’s put on hold.
When someone applies for a DRO, it’s actually the official receiver who accepts or rejects it. If the DRO is offered, then there’s a 12-month (this can vary) moratorium during which the borrower doesn’t have to pay anything. If the borrower’s situation hasn’t improved by the end of the moratorium then the debt is discharged.
The downside of a DRO
As you can imagine, a DRO has a big impact on your credit rating for six years and your details will also be publicly available on the Individual Insolvency Register.
You also have to pass quite strict eligibility tests to get a DRO. You must owe less then £20,000, have less than £50 in disposable income each month and not own any assets worth more than £1,000. These are just a few of the criteria, so you should always talk to a debt adviser before making any decisions.