The government has today launched a consultation about the way debt management companies work, which in the main are currently largely unregulated. 

Debt Management Companies, DMCs, 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. It estimated that there are around 750,000 consumers in such plans with around 100,000 new cases every year.

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.

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: 

Some clients 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, due to volume of work, can take anywhere between six and ten weeks 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 similar to what the professional firms charge, 15%. 

This will reduce the time period of any repayment plan that you have because you are actually paying that little bit more each month.

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 and can be better than the non fee charging firm.

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 extremely busy 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.

The consultation is expected to conclude in December with the government expected to make an announcement early next year.

The consultation is to consider three options, depending on the opinions expressed by the parties that take part in the consultation:

1. Bring debt management under a formal system of regulation 
2. Introduce a new code of practice for companies operating in this area
3. Leave the situation as it is and allow debt management companies to continue unregulated

Debtwizard supports option 1.

You can find more on the pros and cons, procedure and examples of when not to propose a debt management plan by visiting the DebtWizard guide to debt management companies.