What do Debt Management Companies, DMCs, actually do?

They offer a service whereby they act as a go-between for someone who owes money (often referred to as the debtor) and the lenders (known as creditors) that the debtor owes money to. The DMC makes contact with the creditors on behalf of the debtor and then draws up a contract between the debtor and his or her creditors. Once the contract is ready the debtor pays the DMC one monthly payment, they in turn distribute that payment to the creditors. There is a charge for this no matter what DMC you use, I explain this in more detail below.

How do these firms get paid?

There are simply two types of DMC's -

• Firms that will charge you
• Firms that will charge the creditors instead

Firms that will charge you

Basically these firms will charge you every time they distribute a payment to your creditors; this payment is usually around 15% plus vat which equates to 17.63% of your monthly payment. For example, you pay £200 per month to the DMC, the firm will take on average £35.35 for professional fees, therefore your creditors will receive pro rata payments of the remaining £164.75.

There are some firms that will ask for the first three months payment from you in advance BEFORE they actually start work on your behalf. Stay away from these firms as there are numerous other professional firms that will do the same job with just one month fee and will normally start before you have actually paid anything.

Firms that will not charge you

These types of firms offer exactly the same service as above, however the criticism is that they work in conjunction with the creditors and are funded by the creditors. The impact of this is that the creditors have set specific guidelines to these firms of what they will accept for expenditure budgets such as housekeeping, mobile phone costs, hairdressing expenses etc: We often have clients that claim they have not been given enough money to live on, the expenditure is not realistic and they end up not completing the plan.

Another point to bear in mind is that the non fee charging firm can take anywhere between six and ten weeks, according to volume of workload, to set up a telephone appointment to go through your finances, for some this is just too long which is why they then go to the fee charging firms as with these it is generally dealt with on the same day you make contact.

On the plus side 100% of your monthly payment will go towards your creditors and in return the creditors give the firm a commission. This will reduce the time period of any repayment plan that you have because you are actually paying that little bit more each month. For many consumers this works well. It is all down to individual choice of the consumer based upon the merits of each case.

Important note

It does not matter which firm you use as it is up to each individual creditor whether they wish to stop applying interest and charges to a debtor's account. Therefore this has no bearing on selecting one firm in preference to the other in the hope that creditors will stop the interest being applied.

Generally speaking a fee charging firm will have more resources to employ staff to harass creditors into freezing interest on your behalf, the sooner the interest is stopped on the account the quicker the debt will come down. Some say this is what you pay a firm to do.

Due to the current debt crisis in the UK the fee charging firms have seen a massive increase in demand for their services because the non fee charging firms, of which there are only a few, are often swamped and can take longer to set up these plans. Debtors need action sooner rather than later and many accept that they have to pay for such a service. There are pros and cons for using either of the fee charging or non fee charging firms as detailed below.

Pros and Cons

There are three main advantages for using a DMC: