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Defining Disposable Income For Debt Management Plans

by on June 19, 2012

in Debt Management

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Many UK residents use a debt management plan to get themselves out of debt. They retain a company skilled in operating these plans that negotiates and manages a fixed monthly payment for qualifying debts. This payment is based on the amount the debtor can afford to pay. A single payment serves as the monthly submission for all debts included in the plan, with the plan operator distributing the appropriate portion of the payment to each covered creditor.

When this plan is used, the debtor is committing to repay unsecured debts in full. These debts are not guaranteed against an asset such as property. Creditors may agree to freeze interest charges while the plan is in place, making it more affordable for the debtor to repay what is owed. Some will even stop further collection action. However, they are not obligated to do either because this plan is an informal way to manage debt.

A debt management plan is only a suitable solution when the debtor has money remaining each month after paying essential expenses. This money is referred to as disposable income and is calculated by adding all sources of income to arrive at a total and then deducting living expenses and other financial commitments other than the unsecured debt that will be included in the plan. Rent or mortgage payment, utilities, council tax, fuel, and food are several examples of expenses. If the monthly disposable income figure is little to nothing, the individual should not pursue this plan.

There are several reasons to calculate disposable income. The figure shows how much money will be available to pay toward unsecured debts. Creditors look at the figure to determine how likely the debtor is to make continued payments under the debt management plan. The number should be large enough to enable repayment of unsecured debts over a reasonable timeframe. If the figure is small and the debts are large, the repayment term may be too long in the eyes of a creditor.

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Though there is a formula for calculating disposable income, the practice is not an exact science. Most plans run for several years, making it important to calculate disposable income correctly. If a debtor proposes to pay creditors too much money, the individual may struggle to cover other expenses. On the other hand, offering to pay too little will extend the debt repayment period, which could make creditors reject the plan.

When considering debt management companies, debtors should look into several areas related to disposable income. They should ask whether the company has a minimum monthly payment requirement. If so, each debtor must determine whether this amount is financially feasible. Debtors should never feel pressured to agree to a monthly payment that they cannot afford.

Unexpected expenses should also be accounted for when calculating disposable income. It will be difficult to pay an emergency expense when money has not been set aside for this purpose. An experienced and reputable debt management company always accounts for the unexpected and never exerts pressure regarding the monthly payment amount.

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