What does a debt management plan do? StepChange

Put simply, a debt management company manages and consolidates your debts into one single monthly payment.

It sounds simple, right? Well, in theory, debt management companies can be an attractive option if you’re struggling with debt because the process sounds simple, but there’s a little more to it than meets the eye.

Debt management companies aren’t free; their service comes at a price that may impact the amount paid to the creditor. This is a significant factor to consider, so we’ll return to it later.

For now, let’s explore how the debt management plan works.

Meet Mark...

Mark is worried sick with debt. He’s built up over £30k of debt on credit cards and loans, and it’s becoming completely unmanageable. Every month, £1100 leaves his account on debt alone, and he’s sinking deep into the red. One day, Mark decided to contact a debt management company to see if they could help him regain some control. It took about 2 hours of being passed from person to person, but here’s what happened…

The DMC started by obtaining all the details of Mark's debts. This included things like who his debts were with, his account balances, and specific information such as reference numbers. Initially, It felt pretty daunting, as they wanted to gather as much information as possible from him. To make it easier, the Debt Management Company asked Mark for any letters or statements that held this information to create a complete picture. Before passing Mark on to the next person, they walked him through all the options to tackle his debt - an essential requirement of the FCA.

Next, Mark spoke to someone who took him through an income and expenditure form to better understand his financial position. They were looking for what funds he had left at the end of each month. As it turns out, Mark could only afford £700, whereas he had been paying a massive £1100 up until now.

Now, back to Mark…. Finally, the Debt Management Company went through the terms and conditions with Mark and a breakdown of fees he would be paying as part of the monthly payment. Mark agreed to go ahead. The paperwork was sent. Mark signed it, and so the process began.

The debt management company informed all the creditors that Mark was now in a debt management plan. From this point on, the debt management company handled all correspondence. If Mark received any letters, emails, or anything about his debt, he just sent the information to the debt management company. When the calls came through, he informed them that a debt management company was handling his debts.

He sighed a big sigh of relief because he finally felt in control. It’s important to remember that using a debt management company is just one of many options Mark had to take control of his debt. Before agreeing to an arrangement like this, it’s essential to understand what is in it for them.

Like any other profit-making business, a DMC is in business to make money. So, how exactly do they make money from your debt? They will do one of two things when you pay them the agreed monthly payment.

Take a fee from the agreed single monthly payment you are paying them.
For example, if you’re paying £100 monthly, they may take £30. This means only £70 of your monthly payment will go to your debt and the creditors.

Take a fee as a "donation" from the creditors.

For example, if you pay £100 per month and have five creditors, each creditor might receive £20 per month, of which a percentage will be paid back to the debt management company from the creditor.

The StepChange debt management plan is a prime example of this method. However, it’s crucial to understand that this approach could create a conflict of interest. To delve deeper into this, we recommend reading our article 'What you MUST know before using StepChange Voluntary Arrangements.'

The Real Debt Guy is a qualified financial adviser and a UK debt expert. The information in this article is considered to be true and correct at the publication date.