Debt management

Helene Mueller
eCollect support team

Debt management is a service, provided by debt collection agencies (DCAs) or private debt advice companies and organisations. This service ensures an access to different management plans, which help consumers in debt to lower their total default monetary amount. If the original lender agrees to such repayment option and an official contract is signed, he is will usually agree to freeze all additional charges and interest fees, which are to be paid by the debtor. In return, the borrower has to repay the past-due payment sum in full, separating the obligations into equal monthly disbursements. Usually, when using debt management for repaying old debts, the consumer will have to pay more. But as the managing plan is being worked out in compliance with debtor’s financial condition and income, the payments will be conformed with his monthly income. Different organisations regulate debt management procedures, e.g. in UK a subject in debt can appeal to the Debt Advisory Centre (ext. link 1), and in Scotland- to the DACS (ext. link 2).

Debt management plans

A DMP (debt management plan) represents a structured and analytical debt solution, followed by a formal arrangement and sealed with written contract, signed by both parties- first party (creditor) and second party (consumer). It affects only unsecured debts, which can be either individual or business-to-business. The period of time for repayment is fixed and usually varies between 3 and 6 years, depending on the country.

Such plans provide reduction of monthly payments for consumers in debt. Before signature of the new contract, the party offering the repayment service prepares a thorough scheme of debtor’s monthly income and drain. Depending on consumer’s wage revenues the default managing company will calculate possible monthly debt taxes, which the debtor will be able to afford due to his financial state. The monthly debt payments are calculated on the base of debtor’s disposable income (the difference between expenditure and earnings). In United Kingdom debt plans are controlled by the Financial Conduct Authority.

DMPs are preferred by many consumers in debt, as the contract agreements following these plans are often non-binding and better choice than other official and formal debt repayment solutions, i.e. bankruptcy, sequestration procedure, Trust Deed (available for Scottish debtors), etc. However, not in all countries freeze of interest is obligatory for the creditors. In Scotland and the United Kingdom, for example, a lender may decide not to stop additional fees addressed to the indebted subject, but Scottish debtors can choose more convenient options, such as DASs (Debt Arrangement Schemes) and in UK an alternative to the debt management is the Company Voluntary Arrangement for business debtors, and the Individual Voluntary Arrangement for consumer debts.

A debt management scheme can be performed by a DCA (Debt Collection Agency), acting on the part of the original creditor. In such case, the debtor will not have to pay extra for such repayment plan. If the creditor is averse to stop all supplementary and additional payments to the debtor, the consumer will benefit from the situation, and will have to pay only the clear sum of his default, without any extra charges. If, however, the management plan is carried out by a private management debt agency, it will charge the consumer in debt additional fees for providing the debt repayment service.

A debtor can prepare such plan on his own, making a budged scheme and reducing some of his needless and unnecessary costs, e.g. stop the usage of credit cards, until he is debt free. If a subject prioritises his defaults properly, he will be able to clear his debts on his own, without using a DCA or a debt management company. If, however, the consumer is not confident, he can always look for professional help from private DMP organisations or credit counsellors.

DMPs and debt ratios

A debt ratio is connected with two varieties: DMR (debt management ratio) and personal DIR (Debt-to-Income Ratio). A debt management ratio, also known as debt equity ratio, applies to business corporations, lending monetary amounts to borrowers (individuals or corporate borrowers). The management ratio is represented by a formula, which indicates the difference between company’s total liabilities and its shareholders equity and calculates the organisation’s income per month.

Such equity ratio can also refer to personal financial condition of an individual debtor (debt-to-income personal ratio), where total debt obligations and total monthly income are included. If the ratio is higher (i.e. lower earnings in comparison with debt taxes per month), it is considered that there is greater risk for the consumer for falling into debt. Before lending an amount, every creditor will research consumer’s credit history and calculate his DIR. This research aims to estimate the percentage, which determines what is the possibility the borrower to fall behind with his monthly payments and become a debtor.

Used literature & external links