FOOL'S EYE VIEW
Why You Should Avoid Debt Management Companies

By Jane Mack (TMFJane)
February 22, 2005

In an ideal world we wouldn't get into unmanageable debt. Indeed, in an ideal world we'd all handle our money sensibly, we'd save instead of spending and we'd never suffer from the loss of a job or an illness that impacts on our finances.

But life isn't simple and with levels of personal debt soaring, it's not surprising that more and more people are finding themselves in serious trouble.

As a result debt management companies have sprung up all over the country offering to solve all your debt problems for you. You know how their headlines go:

Are you struggling to pay credit cards, loans and store cards?

Would you like someone to talk to your creditors for you and help you sort out your payments?

Would you like to be able to pay one affordable amount for your debts each month?

Naturally, if you're tearing your hair out with despair every time yet another bill arrives on your doormat your answer is going to be 'Yes, yes and yes!" But beware.

Most of these debt management companies will cost you money - money that could be better spent paying off your debts. The way they work is that they provide advice to you and negotiate with your creditors on your behalf to set up a payment plan that typically involves a reduction in monthly payments and a freeze on interest charges. You then make one monthly payment to the debt management company which is then distributed to each creditor.

The debt management company will either charge a percentage of the monthly payments or a percentage of the monthly saving as a fee. In addition the entire first month's payment may be kept as a deposit or a charge for setting up the payment plan.

For example, the (truly) free debt management company, Payplan, offers this as an example of charges by some of the better-known debt management companies:

DEBT MANAGEMENT COMPANY	SET UP FEE	MONTHLY CHARGE	MIN/MAX FEE PER MONTH
Harrington Brooks/ All Clear Finance	First month's payment	17.65%	none
Baines & Ernst	First month's payment	17.625%	Min £25 / Max £90
Chiltern	First month's payment	16%	none
Gregory Pennington	First month's payment	15%	Min £25 / Max £100

Debt management companies don't usually act as lenders but they can 'sell' you a loan from another company for which they will be paid a fee. The same goes for remortgaging to release equity from your home and these days you'll even find them offering you banking services and payment protection insurance for your debt management plan.

Alternatively, they may sell you the idea of using an Individual Voluntary Arrangement (IVA) - a formal legal arrangement to pay off creditors - from which they can earn anything between £1,500 and £3,000 plus VAT which comes out of your pocket. IVAs aren't suitable for everyone not least because if you default on your payments, the law requires that you be made bankrupt.

At any rate, using a fee-charging debt management company could mean that you find yourself paying exorbitant fees for the privilege of making lower monthly repayments over a much longer period of time, thereby increasing your overall payment, and being persuaded to buy ancillary services too.

Some of the more dubious companies may also not try as hard as they should to get your interest charges frozen in which case your debts are likely to increase. And, you could still end up being chased for money by collection agencies and getting County Court Judgements made against you.

So, what's the alternative? Well, both the Consumer Credit Counselling Service and Payplan, which are the two most popular such companies on our Debt discussion board, provide their debt management services for free. Funding comes from the sections of the credit industry who think it far better to take a responsible and sympathetic view of customers in financial difficulty and want a realistic and practical solution to the problem. After all, they're far more likely to get their money back by being accommodating!

Therefore, the likes of the CCCS and Payplan will do exactly what other debt management companies do - they just do it for free so that 100% of your money is used to pay off debts. They won't try and sell you anything either!

More: Visit our Get Out Of Debt centre and get a free copy of your credit report plus a free Fool 'Get Out Of Debt' handbook.