moneysupermarket.com's guide to debt management

Although the UK officially came out of recession last week the hangover from the impact of unemployment, the high level of personal debt, and the prospect of rising interest rates will drive an increase in the number of people taking out a debt management plan in 2010, according to moneysupermarket.com's debt expert.

For most people a fee charging debt management plan is a last resort and consumers should explore do-it-yourself solutions and debt guidance from organisations such as the Citizens Advice Bureau and CCCS.  However, with many organisations struggling to cope with the rising tide of people with problem debt, waiting times can be long.  As a result many customers opt for a fee charging debt management company which can offer the prospect instant relief.

With around 20,000 people signing up to debt management plans every month, for those who can no longer control and service their debts, a debt management company could be the right solution; however moneysupermarket.com warns about the many potential pitfalls in the unregulated minefield of the debt management industry.

Tim Moss, head of loans and debt at moneysupermarket.com, said; "Being in debt and watching red letters fall through your letter box can be an extremely stressful experience, and many people find that hiring a debt management company to negotiate with their creditors for them can bring a real sense of relief. We can expect to see around 30 per cent more applications for debt management plans this year and consumers have to be very careful when dipping their toe into this world, as it currently exists outside the realm of government regulation.

"It can be extremely hard to differentiate between debt management companies as they are not compelled to publish their fee structures or standard practices. Unlike comparing savings rates or credit card APR's there is no openly published way to discern between good and bad providers. moneysupermarket.com lists only DEMSA OFT Approved Code firms which means you can be confident these companies will treat you fairly, but you should still make sure you fully understand how they are going to charge you before entering into an agreement.

"One of the key things customers should check is how many monthly payments will be taken as an up front fee before creditors receive any money. This is vital because the more months that pass without creditors being paid off, the worse your credit record becomes. We have heard of horrific cases where of up to six payments are taken in charges before a creditor is paid, this means you will have paid lots of money to the debt manager before they have cleared a single penny of your debt.

"If you are going to use a debt management company you should only do so with your eyes wide open. Not being fully aware of all the charges involved could make a bad financial situation much much worse."

Tim Moss' debt management checklist:

First of all, be sure that you need a debt management company, look carefully at your budget and try to see if you can renegotiate debt repayments directly with your creditors.

When hiring a debt management company, make sure they are members of DEMSA. DEMSA members are accredited to an "OFT Approved Code" of conduct, by using a DEMSA accredited debt manager you can be sure of receiving a fair service - moneysupermarket.com lists only DEMSA accredited debt managers.

Ask what fee structure the debt manager charges. Typically a debt management agreement can have four different charges. Firstly you'll be charged an arrangement fee. Secondly the debt manager will take a number of your agreed monthly payments before paying off any creditors; this could be as many as six payments for the most unethical debt management firms. Thirdly debt managers charge a percentage fee for each monthly payment they take; this is usually between 15 and 18 percent. The final potential charge is that some debt management companies have been known to take payments from remaining available credit in their customer's finances - customers should avoid this at all costs.