It’s no secret that the European Debt Crisis has left millions of individuals across Europe with serious financial problems. It isn’t just the small people that are struggling either – entire countries have had to ask for financial aid from the rest of the European community.

What’s more, even though the UK refused to adopt the Euro, hundreds of thousands of UK citizens are feeling the strain because of the crisis in Europe. Individual bankruptcies are at an all-time high, and even though we are allegedly now out of the recession there are still thousands of people defaulting on loan and credit card payments each day because they simply don’t have the money to pay.

Thankfully, many lenders in the UK understand that financial situations do change and as a result people often default on their monthly payments. Because of this lenders have developed several methods for improving individual finances, and you don’t always need to declare yourself bankrupt to do it.

One such solution for individual financial problems is a debt management plan. It’s easy to understand how debt management plans work if you take the time to learn about them, but unfortunately a lot of people overlook them because they aren’t legally binding.

How debt management plans work

In simple terms a debt management plan allows you to make one payment per month to your plan’s supervisor who then distributes the money you pay between your creditors.

So for example, let’s say you have three credit cards and a bank loan that you have to pay each month. Your credit card balances are £1000, £2000 and £2000 while your bank loan is for £5000. Due to unforeseen circumstances you find you can no longer keep up all of the repayments and so you contact an insolvency specialist to ask that a debt management plan be put in place.

Your plan’s supervisor will make a list of the debts you have and also outgoings you pay each month. These outgoings will then be compared to your total monthly income. Providing you have at least £100 spare when all of your essential outgoings are accounted for (not including the payments you make to your credit cards and loan) they will agree to put a proposal to your creditors asking for approval for a debt management program.

As part of your proposal, your supervisor will put forward a payment schedule that you can comfortably stick to. So, if you have £160 spare at the end of each month when all of your outgoings have been paid, this amount will be the monthly payment amount. Your proposal will also outline how much each of your creditors can expect to receive each month from the payment you make. Payments to your creditors are pro rata after your supervisor has taken his percentage.

Hopefully your creditors will all agree to the payment schedule and your debt management plan will come into force. Once in place, your creditors will no longer contact you and they can’t demand complete payment of your debts. Most creditors stop interest charges on your debt as well (although this isn’t a condition of the plan). Your plan continues until your debts are paid off, which you must understand could be quite a few years if you have substantial debts.

So now you know how debt management plans work you can decide whether it is the best option for you to improve your finances.