If you are a homeowner and considering a debt management plan to solve your debt problem, we investigate whether you will have to release home equity as part of the agreement.
A debt management plan (DMP) is an informal, none legally binding agreement with your creditors to reduce the amount of your monthly repayments to an affordable amount. Because it is informal, one of the advantages of a DMP is that you will not be forced to release any equity from your home to help repay your debt.
Many homeowners who have equity in their property choose the DMP option for this reason. They want to protect the equity in their property rather than having to release it to pay unsecured debt.
Use equity to pay debt early
Despite that advantage the debt management plan gives in terms of not forcing you to release you home equity, you must make sure you weigh this up against the major disadvantage.
This is that if you chose to use a DMP, you still have to pay 100% of your debt back. The people you owe money to will not automatically agree to write off any of your outstanding balances for you.
For this reason, using a debt management plan will often mean that you are repaying your debt for a very long time.
After being in a debt management plan for a year or two you might find that repaying your debt is going to take longer than you first thought and you may start to consider equity release as a sensible option.
Lump sum settlements
If you do start to consider using equity from your property to pay your debt management plan debt faster, you need to go about this in the right way. It is likely that you will not need to release an amount equal to your outstanding debt.
This is because once you have been in a DMP for a while most of your creditors will be prepared to let you settle your debt for less than the amount outstanding if you are able to make a lump sum payment.
The amount of lump sum you have to make available will vary depending on your personal circumstances. However, it is possible that a lump sum offer of as little as 50% of your outstanding debt could be enough to settle in full.
Remortgage v secured loan
If you are considering using home equity to settle your DMP early, you need to consider the best way of doing this.
An important thing to bear in mind is that your credit rating will have been made much worse by your debt management plan.
For this reason it may not be sensible to change your whole mortgage to release a sum of equity as this would result in the whole mortgage loan being subject to a far higher mortgage interest rate.
A better option would be to consider whether you could take a secured loan against your property. This way only this secured loan would need to be taken at an adverse interest rate. Your original mortgage would remain unaffected.
The decision on equity release stays yours
If you carry out a debt management plan to resolve your debt problem, you will not be forced to touch any equity you may have in your property. It is your decision to be made if you feel it will be a better option for you than continuing to make your DMP payments.
This is a clear advantage of the DMP solution for homeowners.
Depending on how long it is going to take to repay your debt using a DMP, you may decide to release money from your property at a later date to settle your debt if you wish.
Over the longer term many people do decide on this course of action so that they can pay their debt faster rather than keep their debt management plan running for many years.
Related DMP articles:
If you are interested in reading more expert articles about debt management plans, please click on the following link:
http://www.beatmydebt.com/forum/viewforum.php?f=49
What to do next
If you are struggling with debt and are considering a debt management plan, visit beatmydebt.com Our experts are available to speak to you about the DMP option and offer further help and advice. Our vibrant debt forum gives free access to experienced industry experts and others who have suffered with debt problems and have been through the DMP process themselves. Useful guides, calculators and information are also available designed to help you understand how to manage and resolve debt problems.
James Falla is a debt adviser from BeatMyDebt.com in the UK. For more quality and unbiased information on Debt Management Plans, visit our website at http://www.beatmydebt.com/
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Source: http://kiss101.net/will-i-have-to-release-home-equity-if-i-do-a-debt-management-plan/
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