What Is A Debt Management Plan And Who Qualifies?
Many people panic when they get into debt but too few of them address the situation. Before they know it, interest charges and late fees have accrued. Having the utilities disconnected or even losing the home becomes a real possibility. By comparing a debt management plan vs. bankruptcy, people in debt will discover that addressing their financial situation early on can be much less painful than if they wait until debts cannot be repaid.
A debt management plan is a mutual agreement between a debtor and his or her creditors. In this informal arrangement, the parties agree that the debtor will make a fixed payment toward debts each month. This payment is based on how much the debtor can afford and the plan represents a promise to repay the debts in full. Payments usually become more affordable because the timeframe to repay debts is often extended.
A company referred to as the debt management plan provider or operator conducts the negotiations with creditors. This organization also manages payments made by the debtor, allocating the appropriate amount to each creditor. In exchange for its services, the company may charge a fee.
Creditors may agree to freeze interest charges on debts while the plan is being established, limiting the total interest that the individual must repay. Once obligations under the plan have been fulfilled, the covered debts are cleared.
To qualify for a debt management plan, an individual must have cash remaining after paying living expenses each month. A debt management plan is usually recommended if total unsecured debt is no more than £15,000, though it may be suitable for people with more debt or those who have a very high level of disposable income.
Unsecured debt is not guaranteed by the home or other asset. When searching for a debt management plan provider, consumers should make sure the organization is licensed by the Office of Fair Trading and clearly explains any fees involved and who is responsible for paying them.
What Is Bankruptcy And Who Qualifies?
Bankruptcy involves using assets of the debtor to repay creditors. During bankruptcy, an individual is subject to various restrictions and after a certain period, typically 12 months, the person is freed of the debts. Anyone can request that a court make them bankrupt, but procedures vary for partnerships and companies. Creditors can also petition a court to make an individual bankrupt if that person owes them at least £750. Once the court issues the bankruptcy order, the party is considered bankrupt.
The financial interest in the property and all assets of value must be turned over to the trustee of the bankruptcy, who may be an authorized debt specialist or an office of the bankruptcy court. Assets will not be returned following the bankruptcy period. The individual made bankrupt must also turn over all bank and credit cards. This person is also required to participate in an interview and provide information regarding financial status, assets, and debts.
After being informed of the bankruptcy, creditors must make a formal claim to the trustee for money they are owed. During the bankruptcy period and for three years after the bankruptcy is discharged, all spare income may be applied to debt repayment. If an individual fails to comply with the bankruptcy restrictions or withholds information from the trustee, the discharge may be delayed.
Comparing a Debt Management Plan vs. Bankruptcy
Creditors are not obligated to agree to a debt management plan but covered creditors are required to adhere to the terms of a bankruptcy filing. Both a debt management plan and bankruptcy typically only cover unsecured debts, which are those not guaranteed by property or another asset. Some debt management companies do not charge a fee to establish a debt management plan but there is always a fee involved when filing for bankruptcy.
Under a bankruptcy agreement, the trustee makes payments to creditors using proceeds from the debtor’s property, belongings, and other assets. With a debt management plan, the debtor provides the debt management company with a single monthly payment for total unsecured debts.
All or a portion of debt can be written off under bankruptcy but no debt is written off under a debt management plan. Since monthly debt payments are usually reduced with a debt management plan and interest may continue to accrue, the debt repayment period can significantly increase. With a bankruptcy, included debts are typically written off within 12 months.
While bankruptcies are published on the Insolvency Register, debt management plans are not. Since it is a private agreement, a debt management plan will not negatively affect the career of a company director, professional, or member of the armed forces.
If a business or business owner files for bankruptcy, the business will most likely be closed and all employees will be dismissed. Employment contracts for solicitors, charity trustees, and those who work for the Financial Services Authority prohibit these individuals from filing for bankruptcy.
A debt management plan is flexible, providing the debtor with the ability to cancel it if a better debt management solution is found. On the other hand, the informal nature of this agreement carries no legal protection from creditors. With a bankruptcy, covered creditors are prohibited from taking court action against the debtor, protecting the individual until the relevant assets are written off at the conclusion of the bankruptcy period.
When comparing a debt management plan vs. bankruptcy, several similarities are discovered. Both debt solutions have a negative effect on credit rating. With a debt management plan, default notices are recorded on the credit record. This will make it difficult for the individual to get credit until debts are settled or repaid in full and for up to six years afterwards.
Bankruptcy records are also retained by credit reference agencies for a period of six years. With a bankruptcy, bank accounts will be frozen and new accounts may not be opened, which is not usually the case with a debt management plan.