For a richer life

Debt management companies – best friend or worst enemy?

Debt management companies – best friend or worst enemy? The Consumerist/flickr

The premise of a debt management company is attractive enough; it effectively buys more time for people in debt, through delaying bill payments or renegotiating payment terms. This stalls the legal actions of the creditors that are owed money. But are they really as good as they sound? Using a debt management company is like joining a slimming club to help you lose weight – it can work but it’ll cost you. Also, not all of them are entirely honest. Many (though by no means all) of these companies are legitimate but they charge you for something that you could, and should, get for free.

Debt managers can take much of the stress and burden off your shoulders and some people think it’s worth paying just for that. But remember, the more money you pay them, the less you have to pay your creditors so the longer it will take to pay the debt and the more expensive it will be in the end.

What do debt management companies actually do?

Debt management companies approach creditors on the customer’s behalf to negotiate better terms for repayment. They typically help you consolidate debts to one payment each month (which is spread across your creditors). They then negotiate with creditors on your behalf to try and reduce repayments and freeze interest.

When should you use a debt management company?

A debt management company should really be your last option once you’ve exhausted all other avenues – including friends and family or one of the free debt advisory services.

It can be a good way of minimising financial damage, but only if your debt can be paid off over a short period of time. For example:

  • Mrs A fails to make a bill payment; the creditor charges her extra. She could be hit with ‘insufficient funds for transaction’ charges from her bank or failed Direct Debit fees, which would have been reduced or prevented by a debt management plan.

These plans also consolidate all your outgoings, possibly to more than one creditor, into one monthly payment. Debt consolidation makes it easier to track and stay on top of your expenditure.

The pitfalls to consider

The financial help comes at a hefty price – money education charity Credit Action told us these companies typically charge a fee of 17.5% of your monthly repayments, at a minimum of £30 per month and often administration costs or set-up fees to boot.

A debt management company’s admin fees will take up a huge proportion of your overall spending. This can add one year to the time it takes to pay off the debt.

  • For example, Baines and Ernst take £70 plus two months’ payment purely in set-up costs*. Their fees are 17.625% of your repayments, up to £100 a month. These fees could cripple you even further, especially should your financial problems last more than a year.
  • We also spoke to Debtfixers.co.uk who charge 17.5% on the monthly payments and only accept those with at least £2,000 debt and two creditors. The minimum payment they accept is £100 per month.
  • At Chiltern Debt Management with monthly payments of £100, they take £30, with £200 they take £35 and for payments over £200, 17.5% will be taken.

These fees mean that less of your money is actually going towards paying off the debt, meaning the whole process will take much longer than it otherwise would have. The time until you become debt-free will obviously increase again if you use a fee-charging company and have further expenditure.

*source: payplan.com

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How to pick the right debt management company

Interestingly, it is only since the 1990s that there have been companies that charge for their work; before this debt management was strictly not-for-profit.

Debt management companies that sell products – such as loans and remortgages – on behalf of other obscure lenders, should be avoided at all costs. Handing over your money to anyone instead of creditors really defeats the purpose of working with them.

Put the phone down on any company that says they don’t charge you for their service. They do, it’s just hidden in the payments you are making to your creditors.

If you are at wits’ end, make sure you pick a company that is genuine. There are a number of choices run as charities – some with support from the credit card industry.

Make sure they tell you exactly how much they charge you per month for sorting out your debts and get a second opinion before signing for any products or schemes.

Never hand over bank or other details which could give the company or any third party access to your money, and only go with a company that is registered with the FSA (Financial Services Authority) and has been around for a few years.

If you do choose a private debt management company, make sure you follow the guidelines of the Debt Managers Standards Association. Here are a few options:

  • AllAboutMoney
  • Chiltern Debt Management
  • Gregory Pennington
  • Debt Management Associates Ltd
  • Easierdebt
  • Baines and Ernst

AllAboutMoney have a good reputation for providing clear, upfront and honest debt advice and management.  They take 15% of your agreed monthly repayment amount as commission. While this is obviously still a cost, it’s less than most other debt management companies.

In return for your money, you will be provided with your own Personal Finance Manager (who acts as a single point of contact for all your debt concerns). He or she will do all the negotiating with your creditors so you don’t have to, and create a personalised repayment plan for you to follow. In short, you’re paying for their expertise in both managing debt and dealing with creditors.

Another useful website is Confused Debt – the UK’s first debt management comparison website. Here, you can choose a variety of debt management companies and compare them by debt solutions, costs and savings, in order to find the most suitable solution to their debt situation.

What else do I need to know?

Although things have improved with the introduction of the Debt Managers Standards Association and the OFT, there are still companies in the industry who will give poor financial advice to consumers. “Debt management companies have cleaned-up their act a bit but there are still a few rogue companies offering bad advice,” says Frances Walker from Credit Action.

If you are going to use a debt management company, never pay an up-front fee and always check that the company conforms to the Office of Fair Trading guidelines. You can check out the companies and websites on the OFT consumer credit register.

And remember:

There is no guarantee that your creditors will accept the debt management proposal; they may refuse reducing payments or freezing the extra interest. You could be paying to use a service that was never going to work.

Creditors are still free to take legal proceeding against you at any time.

Your credit rating will go down because it will show details of a debt management plan. This may reduce your chances of being approved for credit in the future.

Find out what’s on your credit record with Checkmyfile, Equifax and Experian and see how you can clean up your credit record in our guide here.

What can I do instead?

Get free debt help

A much better alternative is to use charities that offer free advice and help you to organise a debt management plan:

  • Citizens Advice Bureaux (CAB), provide free, confidential and independent advice from thousands of locations in the UK
  • StepChange Debt Charity, a charity offering online debt remedy service and free debt advice
  • Creditaction.org.uk a national money education charity
  • Christians Against Poverty a national, free debt advice service that runs through local churches.
  • Nationaldebtline.co.ukthe website has some useful sample letters for writing to creditors and a free phone numbers
  • Payplan.com - free debt management company that make repayment arrangements
  • Adviceuk.org.uk – the largest support network for free, independent advice centres in the UK

We also offer lots of free advice to help you organise your finances and start making a dent in those debts. Learn how to detox your finances and read our guide to beating your credit card balance.

Make sure you’ve got the best deals on everything from your credit cards to your food shopping. The best 0% purchase card on the market at the moment is the Halifax All in One Card which gives you 15 months 0% interest on purchases and balance transfers (0.8% handling fee applies). The regular rate of interest is 17.9% APR. If you are accepted at the highest rate of 25.9% APR variable you may not be offered an introductory period on balance transfers and purchases.

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  • Candyda

    Although the service Christians Against Poverty provide is free at point of use, they build in to their calculations a weekly donation to the church. Although this is optional, it is put into the account and the responsibility is on the person in debt to say ‘No Thankyou’. Personally I don’t think many will have the power to say No! It is mentioned in all their marketing, they are not doing anything underhand – but I know from experience during my working life that it is not easy for their clients to decline this donation.

    • Guinness Girl

      Er, what? I think you have got your facts muddled here. CAP do not ‘build in a weekly donation to the church’. Nothing of the sort. You may be thinking of the optional client donation to the charity (NOT the church!), in which case you should read this in their FAQs setting out the way in which this works: https://www.capdebthelp.org/en_GB/clientfaqs The important points are that it is entirely optional – it is only ever put into the budget AFTER a client decides to donate – it is a very small amount (maybe £1-£5 per month) – and is only suggested after 6 months, so there is absolutely no chance that anyone will feel they need to give.

      • former cap client

        Guinness Girl, you really ought to declare fact you work for CAP when maing a point advocating them. Although “voluntary” its added to the clients financial statement after asking them a vauge “if you could afford to donate would you question” that clients feel pressured into saying yes to. You set your caseworkers targets on client giving.