When many people get into debt, they panic. However, some fail to take action to improve their financial status.
As a result, more late fees and interest charges may accrue, leaving them facing dangerous situations like cancellation of utility service or losing their homes.
A comparison of bankruptcy and a debt management plan reveals that handling debt in its early stages can be much less burdensome than waiting until debt payment is unaffordable.
What is a DMP or Debt Management Plan?
A debt management plan is an informal and mutual agreement between a person in debt and the parties to whom that person owes money. The debtor agrees to provide fixed monthly payments for all debts included in the plan. The payment amount is based on what the individual can afford. A debt management plan is a commitment to fully repay debts, not a reduced payment arrangement. The timeframe for debt repayment is typically extended, making monthly payments more affordable.
A third-party organisation called a debt management operator, or provider negotiates revised payment arrangements with each creditor that will be in included in the plan. This company also manages the plan payments, receiving the money from the debtor and submitting the correct portion to each covered creditor. This organisation may or may not charge for its services.
The plan operator may be able to negotiate a freeze on interest and other charges during the establishment of a debt management plan. This caps the amount of interest the debtor has to repay. Once the debtor has fulfilled all of their obligations stipulated by the plan and by their credit agreements, all included debts will have been repaid.
To qualify the debtor must have disposable income after monthly living expenses are paid. Unsecured debt is defined as debt that is not guaranteed by an asset.
If disposable income is very high, a higher level of unsecured debt may qualify for handling through a debt management plan. During their search for a qualified plan operator, consumers should verify that the organisation is registered with the Financial Conduct Authority and uses clear and simple terms to explain all fees and who must pay them.
Defining Bankruptcy And How To Qualify
Bankruptcy is a debt management procedure that uses assets and surplus income held by the debtor to repay the creditors included in the bankruptcy filing. A UK bankruptcy typically lasts for 12 months and several restrictions are placed upon the debtor during this time
After the bankruptcy is cleared, all debts included are written off. An individual, partnership, or company can request that a court issue a bankruptcy, with the process differing for each party. If a creditor is owed £750 or more, it may petition the court to render an individual bankrupt. Once a bankruptcy order is issued by the court, the covered party is deemed bankrupt.
During bankruptcy, all financial interests in qualifying assets of value, including property, must be submitted to the named bankruptcy trustee. This person may be from the Official Receiver’s offices or an authorised debt specialist. Credit cards and bank accounts must also be submitted to this trustee. The bankrupt individual must provide details about debts, assets, and financial status and will be interviewed about the financial situation.
The trustee informs creditors that the individual is bankrupt. These parties must then submit formal claims for money owed. The trustee may deem it necessary to apply the spare income of the debtor to repay debts throughout the bankruptcy and for two subsequent years. Bankruptcy discharge can be delayed if the debtor is not forthcoming with the information provided to the trustee or does not comply with restrictions of the bankruptcy.
Debt Management Plan Vs Bankruptcy: A Comparison
While bankruptcy and a debt management plan have several similarities, they also have many differences. Since a debt management plan is voluntary, creditors are not forced to agree to it. However, all creditors are typically covered by a bankruptcy must adhere to its terms.
Unsecured debts, those not guaranteed by assets like property, are typically the only debts included in a debt management plan or bankruptcy. Bankruptcy always involves a fee, but some debt management operators will establish debt management plans at no charge.
With bankruptcy, proceeds from the assets, belongings, and property held by the debtor might be submitted by the trustee to pay creditors. In a debt management plan, monthly payment for all unsecured debts is provided to the debt management company.
A debt management plan does not involve a write-off of debts but bankruptcy writes off some or all debt depending upon the financial circumstances of the debtor. Bankruptcy generally lasts for only 12 months, while a debt management plan can last for several years based on the amount of debt.
Debt management plans are private agreements, but a bankruptcy appears on the Insolvency Register. A debt management plan is less likely to harm the job of a professional, armed forces personnel, or company director. When an entrepreneur or business declares bankruptcy, the organisation’s future might be jeopardised. Some employment contracts prohibit the job incumbent from filing for bankruptcy.
A debt management plan features flexibility, allowing cancellation if a more suitable way to resolve debt is identified. However, this agreement is also informal so it does not protect the debtor from creditors. In a bankruptcy, a covered creditor may not take court action against a debtor. Therefore, the individual enjoys protection until the bankruptcy concludes and covered debts are written off.
Both bankruptcy and debt management plans negatively affect credit rating. The credit report contains a record of default notices, missed payments and late payments if they’re issued during a debt management plan. Until the debts have been fully repaid, and for up to six years afterwards, the individual using a DMP may have a difficult time obtaining credit.
Credit reference agencies retain bankruptcy records for six years. However, old bank accounts are often frozen during bankruptcy and new accounts can sometimes only be opened with some difficulty. This isn’t typically the case under a debt management plan.