What Sort Of Debt Solution Is Best For You

April 16, 2019

Owing lots of money might seem like an insurmountable problem, one that you will never be free from and this can make it difficult to face up to your debts. Thankfully, there is help out there and there are several solutions available to you. Visit here to find out more about the help that you could get.

Two very effective solutions for debt problems are debt management plans (DMP) and debt relief orders (DRO). They suit different people and different circumstances, so you need to work out which one is best for you:

How do DMPs work?

Debt management plans are ideal for people who cannot quite manage their unsecured debts, but who can make sensible monthly payments and discharge the debt in a reasonable time frame.

Essentially, a DMP is a new agreement between the borrower and creditor. It means smaller repayments each month and while these new payments are manageable, it will mean the debt takes longer to clear.

Creditors are not obligated to agree to a DMP, but most will because it is an effective way to recoup the money from a borrower who wants to do the right thing. The whole amount is paid off and there is no need for expensive and stressful legal action.

If you start on a DMP then you will have to make your payments each month until the debt is cleared. If your financial circumstances improve while you are on the DMP then you should arrange to pay more.

The disadvantages of a DMP

A DMP means that you are paying your debt slower than you agreed to, which will affect your credit rating for up to six years. Even though it is a mutual agreement, you are still “behind”.

You could also pay more interest than you would have done, because there is a longer payback period. Some lenders will waive the extra interest, but they do not have to.

More about DROs

Debt relief orders are for people who need a bit more help than they would get with a DMP. They are for those who cannot afford reasonable payments on their debts and who will not be able to repay them within a reasonable time.

A DRO is a type of insolvency and so anyone with one does not need to repay any money unless their circumstances improve within 12 months. The debtor and the creditor realize that there is no realistic way the money can be repaid, so the situation’s placed on hold.

It is actually the official receiver who accepts or rejects the application for a DRO. If one is offered, there is usually a 12-month period when the borrower does not have to make any payments. If the person’s circumstances have not improved by this time, then the debt is written off.

The disadvantages of a DRO

DROs have serious impacts on credit ratings for at least six years and the person’s details will be made publicly available on the Individual Insolvency Register.

There are also strict eligibility criteria to receive a DRO. The person must owe less than £20,000, have less than £50 disposable income each month and have no assets worth more than £1,000. More criteria apply, so it is important to talk to a debt adviser before making any moves.

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