Your guide to debt management plans: what they are, what they're designed to achieve, what the drawbacks are…

What is a debt management plan?

A debt management plan (or 'programme') is basically a new repayment agreement: if you can't afford to repay your unsecured debts the way you originally agreed, you'll need to find a different way to do it.

Lenders understand that life doesn't always work out as planned, so if they can see that accepting smaller payments over a longer time is the only realistic way of getting the money repaid, they're likely to accept. They don't have to, though.

Anyone can end up struggling to repay the money they've borrowed. That's why there are professional organisations that can provide the help they need.

We could help. We provide debt management plans, along with alternatives for people who need to take a different approach. You can talk to an adviser and find out about your options on 0800 195 2911.

But we're not the only ones. You could contact StepChange, for example, or the Citizens Advice Bureau, and find out what they could do for you.

How does a plan start?

If you can't afford your payments, you could contact your lenders and ask them to accept smaller payments - or you could ask a debt management organisation to do it for you.

Either way, your lenders would need to know what you can afford to repay every month. So you (or your representative) would need to show them what you earn every month, what you need to spend - and what you can afford to give your unsecured lenders.

If they accept, your plan can start.

What happens once it's started?

If you have a debt management organisation working for you, they should handle the day-to-day aspects of your plan. Every month, you'd make one payment to them, which they'd distribute among your lenders as agreed.

They'd also answer letters and phone calls and basically deal with any issues that arise. Life doesn't stand still while you're repaying your debts, so your plan may need to adapt if things change. If your rent went up, for example, you'd have less every month to pay into your plan.

If debt management still looked like the best way to tackle your problems, your organisation would figure out a new budget for you. They'd then go back to your lenders and talk to them about accepting lower payments - again, lenders don't have to accept this, so they'd have to be convinced that it's the best way to get the money repaid.

Not every change is a change for the worse, of course! If your income went up, you'd be able to pay more towards your debts every month. This could save you a fair bit of money in the long run, as well as getting you out of debt faster.

Depending on which organisation you're dealing with, and how they're funded, they may charge a fee for their work.

If you're not working with a debt management organisation, you'd need to deal with your lenders yourself.

When would my plan finish?

If you and your lenders feel it's working out, your debt management plan can just continue until your unsecured debts are repaid in full.

If you or they didn't feel it was working out, you wouldn't be forced to stick to it - if your situation took a serious change for the worse, for example, you might need to consider a different way of approaching your debt problems (possibly bankruptcy).

Would I be able to start a debt management plan?

Only if you need to. It's not just a way you can choose to reduce your payments - if you can stick to your repayment agreements, your lenders will insist that you do!

What kind of debts would it cover?

Unsecured debts only: credit cards, overdrafts, unsecured loans, etc.

What about secured debts?

A plan wouldn't directly help you with any borrowing that's secured against property, like a mortgage / secured loan. However, it should help you stay on top of those 'secured debts', since your payments into your plan would be set at a level you can afford after you've taken those monthly payments into account.

What about arrears?

'Priority' debts (like a mortgage) are simply more important than 'non-priority' ones (like a credit card). If you don't keep up with them, you could face serious consequences (like losing your house, for example).

So if you're in arrears on your priority bills, you really need to address this - and your unsecured lenders know this. You wouldn't be able to include your arrears in your debt management plan, but your unsecured lenders might accept lower payments for a while if it frees up the money you need to pay off your arrears over a reasonable time. Once they're gone, you can start putting that money towards your unsecured debts every month.

Want to know more about the different kinds of debt?

What about interest?

Lenders might agree to freeze interest while you're on a debt management plan, but they don't have to. If they don't, be aware that repaying any debt more slowly will mean it costs more, since it'll have longer to accrue interest.

What about my credit rating?

Making smaller payments towards your debts will affect your credit rating, since it means you're not sticking to your original repayment agreements. This is true whether or not you're actually on a debt management plan.

Is it a kind of insolvency?

No. There are various kinds of personal insolvency in the UK:

• Scotland: Bankruptcy (also called Sequestration), Protected Trust Deeds

• England, Wales & Northern Ireland: Bankruptcy, IVAs (Individual Voluntary Arrangements), DROs (Debt Relief Orders).

These are all very different to a debt management plan, for a number of reasons. For example:

• They're designed to help people who can't repay what they owe in full in a reasonable time - so they can actually write off some of what you owe.

• They'll appear on a publicly available register, so other people could find out about your insolvency - while a debt management plan is completely confidential.

• They'll be over after an agreed period of time, while a debt management plan would last as long as it takes to repay what you owe in full.

• Some forms of insolvency can result in the sale of your home.

What about the Debt Arrangement Scheme (DAS)?

DAS is a kind of 'statutory' debt management plan that's only available to people who live in Scotland. Some of the biggest differences are:

The DAS Administrator can actually approve a repayment plan (known as a Debt Payment Plan - DPP) even if a lender doesn't agree to it.

• It's legally binding once it's begun.

• Interest, fees & charges are always frozen once a DPP begins.

• If you're on a DPP, it will appear in the DAS Register, which is publicly available.

Figuring out the right approach for you can be complicated. Try our debt solution finder if you'd like to find out more about your options. You'll get some on-screen advice about the solution that looks right for you, then one of our advisers will phone to go over your finances in more detail and help you decide on the best way to get your finances back in order.