What Are Debt Management Companies?
Debt management companies typically operate as not-for-profit and commercial services that help people clear debts owed to secured and unsecured creditors.
In this post, the repossession stoppers at Property Solvers highlight the 20 leading organisations operating in this space.
We also discuss how these organisations work, free vs. paid services, potential damage to your credit rating and whether going ahead with a debt management plan (DMP) is actually worth it.
The Top 20 Debt Management Companies Are…
It’s important to note that using a debt management company is not for everyone and much will depend on your particular circumstances.
For this reason, we have started our recommendations with the organisations that run free services with the paid-for operators towards the bottom of the list…
How Do Debt Management Companies Work?
Debt management companies will usually start by having a conversation regarding your specific situation – asking questions such as:
- How much debt do you owe? This includes credit cards, personal loans, overdrafts, bank loans, payday loans, store cards and private loans from friends and family
- Who are the loan companies you owe money to?
- Do you have any arrears and/or default notices in your name?
- What is your monthly income after tax and National Insurance Contributions?
- Are you employed or self-employed?
- What assets (such as property) do you own?
- Do you have any properties that you would consider selling or auctioning (to release equity that will pay off your debts)?
- How is the debt split between the loan companies?
- Which loan companies do you owe the most amount of money to?
- Whether the debts are just with yourself or if there are any other jointly responsible (such as a spouse or business partner);
- What conversations have you had with the loan companies?
- Have you broken any previous agreements with the loan companies?
- Do you have any mortgage arrears or other secured loan debts such as those from hire purchase agreements you have entered into? If so, by how much and how many months?
- Do you have the means to clear any of the debts yourself?
- How much do you spend on a monthly basis (such as food shopping, utility bills, council tax, transport and your children’s necessities)?
What Happens Next…
With your permission, the representative will cross-reference the information you provide with credit reference agencies or direct with the lenders.
They will then take a close look at your financial situation and how much you can realistically afford to pay clear your debts. This will take your ongoing bills and expenses into account.
The debt management company then negotiates with your lenders to agree to a set monthly payment and some take a commission as part of the service. This is often known as a Debt Management Plan (DMP).
You will then typically pay them directly, spread over a period of time, and the debt will be cleared with the individual lender(s) on your behalf. In most cases, the creditors will freeze ongoing interest charges and make arrangements for them to be paid
Your monthly payments will also be monitored to ensure things are kept on track.
Note that the overall amount of debt you will pay back will be lower than what you originally owed.
How Much Are Debt Management Company Fees?
Much will depend on which company you use but you can expect to be charged anything between 12% to 20% of the monthly payment. Others charge a fixed fee which can be spread over the duration of the management plan.
Note that there may also be set-up and administration fees to pay (these can be spread over the term). Watch out for so-called “handling fees” every time you make a payment.
Free providers (usually charities) such as Step Change Debt Charity sustain their operations by getting paid by lenders and credit card companies.
Free vs. Paid Debt Management Services
Some argue that commercial debt management companies offer a better level of service as they can avoid being influenced by creditors and, as a result, achieve better outcomes.
Others say that using a debt charity is the best choice as they’re not commercially driven. However, repaying your debts with free providers will usually take longer as there will be lower amounts being paid to your creditors.
Regardless of which option you choose, always read the small print and seek independent advice before signing up. If you do decide to cancel, there may be associated fees and other costly implications.
Related to this, although these plans are not legally binding, if you fall behind payments under the Debt Management Plan – the lender may take more serious steps.
You can choose to change the terms of the plan say, for example, your salary increases and you can afford to clear off more of the debt.
Does Using a Debt Management Company Damage Your Credit Rating?
In short, yes. This is because using a debt management company will usually mean that your repayments work out lower than what they would be normally. Creditors may also report that you have defaulted.
As a result, there will be “markers” on your credit report (through organisations like Equifax and Experian). These will remain on your credit file for 6 to 7 years which could result in difficulties in taking further unsecured loans, mortgages and renting a property. Similarly, any evidence of repossession will also remain on your credit file.
At the same time, using a debt management company can – over the medium term – help you get back into a position where you become creditworthy. It’s certainly a better option than insolvency or bankruptcy
Is a Debt Management Plan Really Worth It?
Having another organisation take over dealing with your creditors can save a lot of hassle and stress.
The pace at which you reduce your debt may be slower than you expect – often due to lower payments and paying off extra fees if you’re using a paid-for debt management service. The lenders may also still want their interest to be paid back and contact you independently.
Remember to calculate the total amount of debt you will have to pay back including the debt management company’s fees. It may turn out to be more cost-effective to figure out your own way of paying back the debts. Others choose to negotiate with creditors themselves.
Although credit card and other unsecured lenders can be harsh (and sometimes rude) when you approach them, it’s worth facing the situation head first and think about the bigger picture of a debt-free life.
Perhaps you have another way of clearing the debts. Do you have any possessions that you could sell – perhaps the extra car. These days, it’s never been easier to get rid of items for a pretty good price on sites like eBay and Gumtree.
Note the Following…
Remember to check that the debt management company is registered with the Financial Conduct Authority (FCA) and follows the Consumer Credit Sourcebook (CONC). There have been a number of firms that have been struck off in recent years due to non-compliance of the strict requirements of this governing body.
The good organisations will take the time to truly understand your situation and have your best interests at heart. This includes recommending alternative options if it’s the best way forward.
There must be no misleading claims and all the contracts must clearly state the following as a minimum:
- The exact details of the debt management plan
- The total monthly costs (including associated fees)
- The total amount to be repaid and the set timeline
Also, be cautious of companies you come across that offer a “free” service which in many cases is false advertising. Note that most charities operating in this space can be trusted.
Also, with paid-for debt management services, make sure that at least 50% of the monthly payment is paid to creditor. This may increase over the term of the repayment plan – but you should work with companies where the majority of the payments will be going towards clearing the debt.
Remember to also check that your creditors are fully on board with the repayment plan. Some have been known to demand for full repayment even if you are keeping up with things.