Will debt management protect me from my creditors?

13 August 2009

Many people with debt problems worry that their lenders may take legal action against them if they can`t keep up with their debt repayments.

Bailiffs, County Court Judgments (CCJs), Charging Orders, Attachments of Earnings - depending on the type of debt you`re struggling with, your lenders may decide that taking legal action is the best way of recovering the money you owe.

First of all, it`s important to realise that the County Court isn`t there to punish you. If your case ends up in court, the court won`t `find you guilty` (or `innocent`), but will try to settle the dispute between you and your creditors - and determine the best way in which you can repay your debt.

Can debt management protect me?

It`s equally important to realise that creditors generally don`t want to take legal action. If you can`t afford to repay your debts as you originally agreed, they`d probably prefer it if you could come to a new agreement with them - a realistic way of repaying the money you owe without needing to get the court involved.

This is where debt management can help. A debt management plan is an informal agreement with your lenders in which you`d make reduced monthly payments that are based on what you can afford to pay in your current financial situation, rather than what you thought you`d be able to pay when you took on the debt in the first place.

Of course, making smaller payments will mean you`re repaying your debt for longer, and that may mean you`re paying more in total (unless your lenders agree to freeze interest). Plus, your credit report will show that you`ve not stuck to the original terms of your agreements, and this may make further credit more expensive and/or harder to obtain for the six years it stays there.

How does debt management work?

Basically, you`d start by calculating your income and expenditure, so you could see exactly how much `disposable income` you have. This is what you could put towards your unsecured debts every month.

You`d then need to figure out how much to offer each lender. Creditors may be more likely to accept an offer of reduced payment if they can see that it`s a fair payment - that you wouldn`t be able to pay them more without treating another lender unfairly. So you`d need to calculate `pro rata` payments, which means you`d propose to pay each lender a percentage of your disposable income that`s based on how much you owe each lender (as a percentage of your total unsecured debt).

Many people choose to enter a debt management plan organised by a professional debt management company. Debt management experts can help you with the calculations and negotiations with lenders. This doesn`t mean there`s a guarantee they`ll accept the proposals, but it does mean you`d get professional help with everything - and the company may handle all correspondence with your lenders, so you don`t have to deal with it all yourself.

For more on debt management, talk to one of our debt advisers on 0800 074 8639 or click here to request a free call-back.

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