Creating An Effective DIY Debt Management Plan
1. What Is A Debt Management Plan?
It is simply a well researched and structured written plan of how you intend to deal with your debts and meet repayments, if you are experiencing debt difficulties. It is an informal arrangement that can either be negotiated directly with your creditors (the people that you owe money to) or can be arranged through a third party such as a debt consolidation company. Because it is an informal agreement, organisations are not bound by the debt management plan you put forward and can still decide to take more drastic action against you, however most reputable organisations are usually willing to consider reasonably proposals made through a debt management plan.
2. Prioritise Your Debt
Sometimes the debt mountain can be so overwhelming that it is difficult to keep track of what you owe and to whom. It is critical however that you take time to work out all of your debt commitments and make a record of the type of debt, current repayment levels and the total debt amount left to pay.
You should break down your debts into those that would have a serious and immediate impact upon you if they were not repaid, known as “Priority Debts.” These include rent or mortgage arrears, state taxes such as council tax, income tax or TV licence arrears and also utilities arrears relating to gas, electricity or water bills. Failure to pay these types of Priority Debts could result in repossession, disconnection or serving a prison sentence and as such should always be addressed first.
The second types of debts that you should identify from any list you make are referred to as “Non Priority Debts” and often relate to Hire Purchase Agreements, Credit and Store Cards and personal loans or finance arrangements. Whilst these can still have a serious impact if you fail to make repayments and could ultimately result in bankruptcy, they will not directly impact upon your day to day living arrangements.
Essentially what you are trying to do is to sort out the Important priority debts from the urgent Non priority debts.
3. Create A Budget and work out what you can afford to pay.
There are very few people who would openly admit to enjoying the process of budgeting because it takes time and commitment, but the chances are that the reason you are experiencing debt difficulties in the first instance is because you have little idea of how much you are spending compared to how much you are earning. Take some time to write down all your income whether from employment or state benefits or pension and then make a list of all of your regular monthly outgoings (expenditure). If you have never created a budget before it may help to go back through your monthly bank and credit card statements and work out over the last 3 months where your money gets spent. List absolutely everything that is a regular expenditure not matter how small or insignificant and then use this to identify negative spending habits that could be altered to free up some cash to meet your debt repayments. For example spending £2 a day on coffee at the train station on your way to work adds up to £60 per month. If you are not willing to change your spending habits completely then consider compromising and buy coffee every other day, saving you £30 per month!
4. Re Structure Your Debt Repayments
Now that you have a clear budget plan you can link closely about how much you can afford to pay towards dealing with your debts. This part of the debt management plan is critical and requires you to refer back to the list you made of your “Priority” & “Non Priority” debts. If you have outstanding arrears on priority debts then address these first before moving on to address your non priority debts.
Work out how much you can afford to pay for each debt and make a written note. For example if you are £1,000 in arrears with your mortgage repayments then work out how much of the arrears you could feasibly pay off each month but be realistic. Remember that you will have to continue to pay your usual mortgage repayment in addition to any arrears owed, so if £20 a month is all you can afford towards paying off your arrears then that’s fine.
5. Putting Your DIY Debt Management Plan Into Action
Now that you have made a record of your debts, identified negative spending habits and created a budget planner and have a clear picture of what you can afford to pay, you are ready to put your DIY debt management plan into action. You should start contacting your creditors (those that you owe money to) and provide them with a copy of your debt management plan so that they have a clear picture of your commitments and more importantly how you intend to address them. A debt management plan provides them with a logical example of how you will address your debt arrears and indicates that you are serious and professional in your dealings with the organisations involved. Whilst it is an informal agreement, most organisations are likely to be convinced by your arguments if you have a clear structure which is provided through detailed calculations contained with your DIY debt management plan.
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