Shadow

Debtbuster tips: Creating personal debt management program

Whether suffering from long-term debt problems, or simply looking to reduce personal debts after an expensive season such as Christmas, the creation of a personal debt management program is always a good idea to improve long-term financial health.

Creating a Debt Management Program: Income and Expenditure

In the first case, one should consider that the key to good financial health relies upon a healthy balance of income and expenditure. Debt can only ever be managed effectively where total income exceeds total expenditure on a regular basis.

Start the process by making a list of all the sources of income for the household on one side of a page and a list of all the sources of expenditure on the other. If the total expenditure of the household is greater than the total income, then this will lead to long-term credit problems. As such, each of the sources of expenditure should be prioritised in terms of necessity, and those which are seen as having a low level of priority can subsequently be eliminated until total income exceeds total expenditure.

Once a surplus has been generated between income and expenditure each month, the spare cash can then be used to help pay off debts. Over time, the repayment of debts will lead to greater levels of surplus in the monthly budget, thus speeding up the effects of the debt management program.

Create a Personal Debt Management Program: Reducing Debt

Once a surplus has been established, a key question is to consider which debts to pay off first. In order to decide, each of the debts should be listed once again. However, this time also list the interest rate of each of the forms of debt.

In short, an effective debt management program will focus on the paying back of the most expensive form of debt first, as this will save money on the total amount of interest to be paid back. Frequent first targets are often short term borrowings, credit cards and store cards. Student loans and long-term debt will often be the least expensive forms of debt.

Finally, the total cost of debt may also be reduced moving around one’s sources of finance. Consider tactics such as transferring the balance of credit cards from those with higher rates to lower interest charging cards. In some cases, it may also be cost effective to convert expensive short-term debt into a long-term loan, with a lower interest rate.

In summary, the creation of an effective personal debt management program should reply upon the principals of an effective income expenditure relationship, followed by paying off the most expensive form of debt first and rearranging debts so as to benefit from the lowest interest rates on offer.

Debt Management Plans & Controlling Finances

Hearing the phone ring isn’t exactly a joy when serious debt problems exist. Dealing with creditor harassment is unpleasant and stressful. Don’t let financial difficulties and stress continue indefinitely as a debt management plan can change things for the better.

What is a Debt Management Plan

A minimum of £100 is contributed towards the arrangement each month. The debt management company takes their 15% fee and the remainder is paid to creditors on a pro rata basis. Unlike an Individual Voluntary Arrangement, a debt management plan is only a voluntary agreement and is not legally binding on creditors.

Budget Preparation and the Necessary Paperwork

Put together a personal budget statement documenting all sources of income and expenditure. This should include a full list of creditors, their addresses, account numbers and how much is paid to them each month.

This will allow the debt advisor to work out which unsecured debts can be included in the plan. It will also enable the advisor to see how much can be paid to creditors without imposing further personal hardship.

How the Debt Management Plan is Arranged

An agreement will be sent to sign allowing the debt management company to represent their client. This will document what was discussed over the phone, including a full breakdown of income, expenditure and how much is being offered to the creditors.

If the creditors agree, the program will commence and a payment will be taken from the client bank account by direct debit on a specified date.

Advantages of a Debt Management Plan

No longer having to deal with creditor harassment. All queries can be directed to the debt management company.
It may be possible to stop any charges and freeze interest. This can save literally thousands of pounds, especially on agreements where the APR is very high.
Make a single payment instead of lots of individual payments.
A debt management plan can cut monthly outgoings significantly allowing client’s to pay their mortgage or rent.

Disadvantages of a Debt Management Plan

Debt management companies will usually take the first payment as their fee and then upwards of 15% on all future payments. This means that if £100 is paid into the plan only £85 will be used to reduce debt levels.
Interest and charges on debts aren’t always frozen.
The repayment period can be very long, especially if a lot of money is owed.
It is only a voluntary arrangement and is not binding upon either party.
A minimum of 3 creditors are required.

A debt management plan is an excellent solution for those with debts under £15,000. Those who have larger debts should consider an Individual Voluntary Arrangement or personal bankruptcy because it would take too long to pay off the outstanding money. Always consult a qualified debt advisor before proceeding with any debt solution.

Leave a Reply

Your email address will not be published. Required fields are marked *