Feb 10

Debt management companies – best friend or worst enemy?

When you’re carrying a debt nightmare around with you, debt management companies seem like the answer to all your problems. They offer to take the burden off your shoulders and carry it for you: they promise they have the skills and expertise to keep your creditors happy, while cutting your monthly payments dramatically. It’s all we can do in our exhausted state to avoid weeping with joy as we hand our burden on.

But we shouldn’t be too hasty, because there’s every chance that all they will do is make the burden that little bit heavier, and then hand it back. Debt management companies are not free, and they will not be able to reduce your debts for you. In essence they simply do something that you can get elsewhere for nothing – and then add their fees to your debt burden.

What do debt management companies actually do?

Debt management companies bring together all your debts, so instead of paying lots of different companies, you make one monthly payment. This psychologically feels less stressful because you don’t have lots of different debts – just one big one.

Typically, they then approach everyone you owe money to, and try to negotiate better terms for your repayments. They will ask creditors to freeze the interest and give you more time to pay the money back.

Up to this point, the service is essentially the same as a debt management plan from a free debt advisory service or a charity.

The way in which they differ, is that in addition to this, debt management companies will add significant fees onto your total debts, so that part of your monthly payment goes into paying the company every month.

When should you use a debt management company?

Using a debt management company is better than failing to deal with the problem entirely. If you miss your payments, you’ll face penalties, and if your bank account runs dry, you’ll be hit with charges and fees.You’ll have the double-whammy of interest and penalties inflating the total amount you owe every month.

It also brings your debts together into one monthly payment, which makes it easier to keep on top of.

However, it’s far from the only solution, and it’s definitely not the best one.

It’s perfectly possible to negotiate with people you owe money to on your own. If that feels overwhelming, a debt charity can help put together a debt management plan and negotiate on your behalf. It’s also worth talking to friends and family – who may be able to offer moral and practical support.

The pitfalls to consider

Debt management company services come with a hefty price tag. Money education charity Credit Action told us these companies typically charge a fee of 17.5% of your monthly repayments – with a minimum of £30 per month. There are often administration costs or set-up fees too.

A debt management company’s fees will take up a huge proportion of your overall debt repayments, and can add a year to the time it takes to pay off the debt.

if you’re going to pick a debt management company

You need to understand what you are getting into. Your first question should be exactly how much they charge each month.

Next, you need to be clear whether the company is negotiating with creditors and bringing payments together – or just selling you a consolidation loan or mortgage on behalf of other obscure lenders. The latter should be avoided at all costs, as you will be paying two sets of charges and fees for a loan from a company you are not familiar with.

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 with a good reputation, which is registered with the FSA (Financial Services Authority). They should also have signed up to the guidelines of the Debt Managers Standards Association.

What else do I need to know?

Debt management companiesAlthough things have improved with the introduction of the Debt Managers Standards Association and the OFT, there are still some bad eggs in the industry. “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.

When you use a debt management company, you also need to know that there is no guarantee that your creditors will accept the debt management proposal; they may refuse to reduce payments or freeze the extra interest. You could be paying to use a service that was never going to work. Creditors are also still free to take legal proceeding against you at any time.

It’s also important to understand that 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 is a debt charity offering an online debt remedy service and free debt advice in person or on the phone.
  • is a national money education charity
  • Christians Against Poverty is a national, free debt advice service that runs through local churches.
  • is a website offering a guide to dealing with debt – and has some useful sample letters for writing to creditors.
  • is a free debt management company funded by the credit industry, which makes repayment arrangements
  • is the largest support network for free, independent advice centres in the UK

Money Magpie also has lots of free information which will 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.

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3 thoughts on Debt management companies – best friend or worst enemy?

  1. 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.

    1. 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: 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.

      1. 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.


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