Are you retired but still in debt? Don’t give up! Cashfloat are here to help! In this article you can explore debt management plans for the retired and how they work.
- The number of people retiring with debt is increasing
- Retired people can also start a debt management plan, but it may not be the best debt solution for them
At Cashfloat it doesn’t matter who you are – we’d like to help. Whether you’re a student, a full time employee or a retiree, our blog topics cover a huge range of issues that you might need help with.
In this article, from our guide to debt management plans, we will talk about how retired people can use debt management plans.
How do Retired People End Up in Debt?
Debt is often blamed on recklessness and irresponsibility and young people are often thought of as being more likely to get into debt than older people. However, debt can happen for a variety of reasons and it can happen to people of all ages. Often, debt happens when people have borrowed responsibly, but have then encountered an unexpected event which has made them suffer financially. Life events, such as the breakdown of a marriage or relationship, the sudden onset of an illness or even the death of a partner can all cause financial problems which can lead to debt.
Nowadays, more and more people are retiring with debt. Often, this happens to people who borrowed responsibly with the intention of paying off their debts before they retired, but were unable to do so due to unforeseen circumstances. This leaves them entering retirement with outstanding debts.
Whatever the cause of a person’s debt it can cause them serious problems and a large amount of stress. For retired people, this comes at a time when they were hoping to be able to relax more and, also, when they often have less money available. However, as for all people who end up in debt, help is available for retired people if they end up in debt and no debt problem is unsolvable. Debt management plans (DMPs) are one solution to debt, which retired people may be able to make use of.
How Common Is Debt in Retirement?
If you have debt in your retirement, it may help to know that, these days, many other people do as well. In 2017, the Guardian found that one in four people who retired that year were doing so with outstanding debts. The average amount of debt for these people was £24,000. In 2020 this increased to one in three retirees being in debt. There are many reasons why more people are retiring with outstanding debts than they previously used to. Among the causes of debt for retired people, it should be noted that the financial crisis of 2008 affected many people close to retirement age. As a result of the financial difficulties people faced during the financial crisis, many people are retiring nowadays in debt.
Is There an Age Limit for Debt Management Plans?
There is no upper age limit for starting a debt management plan. Under a debt management plan, creditors are offered reduced monthly payments (usually below minimum payments) which the person who is in debt will pay until their debt is cleared. If creditors agree to the plan then the person will be able to clear their debts at a reduced rate. Anyone who is able to reach an agreement with their creditors, as part of a debt management plan, and can stick to making monthly payments until their debts are cleared will be able to start a debt management plan. The same applies to retired people. However, it should be noted that, while retired people are able to start a debt management plan, some may struggle to meet repayment conditions.
What Should Retired People Do to Clear Debt?
Anyone who ends up in debt is likely to be quite seriously affected. Debt causes a lot of stress and can seriously limit a person’s freedom and financial options. While this is the case, it should be pointed out that no debt problem is unsolvable. While it may seem difficult to see a way out of debt, it is always possible to find one. If you have lost control of your debts, the best thing to do is to seek help and try to get some control over your situation.
Confront Your Debts and Seek Help
If your debts have reached the point where you have lost control of them and cannot pay them off by budgeting yourself and making your normal payments, then you should seek help to deal with them. Often, the hardest part is making the decision to do so. Many people feel at a loss and are unable to confront the problem. However, the quicker you do so, the better. Luckily, nowadays, for people who find themselves struggling with debt, there are many free charitable organisations who can provide advice on how to deal with debt and also lead people the whole way through their recovery from it.
Charities such as StepChange, Christians Against Poverty, National Debtline and the Debt Advice Foundation can all offer advice and support to people who are dealing with debt. One way many of these charities can help is by arranging debt management plans. Arranging a debt management plan can be a complicated process and having the help of an impartial, professional organisation can be a great help.
Avoid Debt Management Companies
As we have mentioned throughout this guide to debt management plans, people who are seeking help with their debts should avoid debt management companies. Debt management companies offer a range of debt services, including arranging debt management plans. However, these companies exist to make a profit and many charge large fees to their clients. These fees come at a time when people who are seeking their help can least afford them. On top of this, the services that they offer are available for free from debt charities.
What are Debt Solutions?
Debt solutions are ways to solve a debt problem. Where someone is unable to budget themselves independently, make their normal payments towards their debts and to pay them off independently, they will seek a debt solution. A debt solution will allow them to make some kind of arrangement, which will either allow them to pay off their debts in a manageable way, to reduce the amount they owe or even clear their debts without paying them. Debt management plans are one kind of debt solution.
While debt management plans are a common solution to a debt problem, they are not the only one. It is important before you start a debt management plan to be sure that it is the right solution to your debt problem. A discussion with an impartial debt advisor should help you to understand whether this is the case or not. It may be that an alternative solution, such as an individual voluntary arrangement (IVA) or a debt relief order is more appropriate.
What is a Debt Management Plan?
A debt management plan is a non legally binding agreement that a debtor makes with their creditors. Under a DMP, the debtor (the person who owes money), usually with the help of a debt organisation or charity, will work out how much they can realistically afford to pay towards their debts and then offer a monthly amount to each of their creditors (the people they owe money to). This monthly amount will be less than the minimum amounts they should be paying. Usually, they will also ask their creditors to freeze interest and fees on the debt while the DMP is in place. This is to stop the debt from spiralling out of control or becoming too difficult to repay. If the creditor agrees to the plan, the debtor will then repay their debts at a rate that is slower than what they originally agreed to when they first borrowed money, but is affordable to them. For a more complete explanation of how a debt management plan works, go to Chapter 3 of this guide.
Setting Up a Debt Management Plan
While it is possible to arrange your own debt management plan, the vast majority of people do it through a debt charity or organisation, such as Christians Against Poverty. Debt management plans are suitable for people who have some spare money to contribute towards their debts, but not enough to stick to the repayment agreement that they made when they originally borrowed money. Under a DMP, people are able to clear their debts in an orderly fashion and to, eventually, get their financial lives back on track. While the basic idea behind them is simple, there are various things to consider before you start a debt management plan. There are also downsides to being on a debt management plan, particularly, the negative effect that it has on a person’s credit rating.
This Cashfloat guide has been dedicated to debt management plans and everything that they entail. Take a look at the contents and see if you can find the answers to any questions that you have.
How Can A Debt Management Plan Help?
One of the main benefits of being on a debt management plan is that monthly payments for debt will be brought down to a manageable level. After budgeting yourself, you will be able to cover your priority debts and living expenses and then make payments towards debts which are covered by your DMP. These payments will be reduced to a level you can afford.
The worry and stress of being in debt can take a heavy toll on people. The strain that debt places on people’s finances and the pressure put on people by creditors are the main sources of stress. Many older people also, unnecessarily, feel stigmatised by debt. Beginning a debt management plan will bring a form of resolution to the problem. Rather than being vulnerable to creditors and unsure about what to do, starting a DMP will allow someone who is in debt to work to a clear plan, under less pressure and to start getting their financial life back on track.
Letters and phone calls from creditors demanding immediate repayment of a debt can be intimidating and can cause a lot of worry. Where there are multiple lenders, the stress can become too much to cope with.
If you have your debt management plan arranged by a debt charity, they will be able to handle contact with your creditors. This includes making complicated negotiations to reduce monthly payments and all further contact after a DMP has started. Removing this burden can be a huge relief to someone who is struggling with debt.
The aim of taking on a debt management plan is to clear a person’s debts and, when they are successful, people are able to get their financial lives back together. Eventually, becoming debt free will be a great relief to someone who begins a debt management plan. While it may take longer than a person originally planned to pay off their debts, a DMP will allow someone to regain financial freedom.
Usually, as part of negotiating a debt management plan, creditors will be asked to stop charging interest and fees while the DMP is in place. This is to stop the debt spiralling out of control or becoming too difficult to repay. This will ultimately reduce the amount that a debtor has to repay and, in the majority of cases, creditors will agree to do so.
Where a debt management plan is arranged by a debt charity or organisation, the debtor will make one monthly payment to whoever arranges their plan. They will then distribute the money fairly amongst their creditors. As such, rather than having to make several payments to several creditors, which can be complicated, a person will only have to make one monthly payment for their debts.
Debt Management Plans – What are the Downsides?
While there are many advantages to starting a debt management plan, including the fact that they can allow a person to become debt free, there are some disadvantages.
For people who are at retirement age, their income may be too low to make payments towards a debt management plan. Similarly, people who are nearing retirement age, may find that the drop in their income which happens when they retire makes it impossible for them to make payments towards one. If this is the case, you should speak to a debt advisor and seek an alternative solution. Many people may have to return to work or continue working for longer than they planned in order to make payments towards their debt management plan.
One disadvantage to starting a debt management plan is that it can take a long time to clear your debts. For most people, a DMP will come when they cannot afford normal monthly payments anyway and, as such, the extra time will be unavoidable. Nonetheless, they are a long term commitment and while someone is on a DMP they will have to budget themselves and ensure that they are able to make regular payments towards their plan. For some people, it may be that an alternative debt solution, such as a debt relief order offers a swifter and more appropriate resolution to their debt problem. A consultation with an impartial debt advisor will usually be able to ascertain whether this is the case or not.
Many people who are at retirement age will be reluctant to begin a long term debt management plan. Some people may be able to remortgage their house, sell assets or find another way to avoid committing to a DMP. Again, you should make sure that you speak to a professional and impartial debt advisor before you decide whether to do so or not.
One of the major disadvantages to being on a debt management plan is that it will damage a person’s credit rating. While a DMP will not be specifically recorded in your credit history (as other debt solutions, such as IVAs are), the arrangements you make with your creditors and the reduced payments you make towards your debts may all be recorded. This will often do serious damage to a person’s credit rating and it can take many years before it fully recovers.
While this is the case, it is possible to repair a credit rating after a debt management plan has finished and when someone starts a debt management plan it usually comes at a time when damage to their credit score is unavoidable.
It should be noted that beginning a debt management plan can negatively affect the credit score of people you are financially linked to. As is always the case with people you are financially linked to, the damage done to your credit rating can affect those you are linked with as well. For many people this will be their partner. For more information on this, go to Chapter 9 of this guide.
It is possible that creditors will refuse to accept the payment amounts that you offer under your DMP and it is also possible that they will refuse to stop charging interest and fees on your debt. In some cases, someone who is on a debt management plan may face action from their creditors, which could include being taken to court. Where a creditor refuses to stop charging interest and fees, they may see their debt increase while their DMP is in place. This can make a person’s situation complicated. However, it should be pointed out that, where a person is able to make reasonable monthly offers to their creditors and is able to prove that that is all they can afford, creditors will normally accept payment offers and stop charging interest and fees.
In Summary…
If you are retired or nearing retirement age and are wondering whether a debt management plan could help you to pay off your debts, then it is always wise to consult an expert. Remember that free and professional advice is available from charities, such as Stepchange and Citizens Advice.
Debt management plans are one solution to debt, which allow people to clear their debts in a manageable way and to get their financial lives back on track. While they do have their downsides, many people have used debt management plans, including people of retirement age, and they can provide a way to escape what can seem an inescapable situation.
It is important to remember that, while debt can be very stressful and difficult, it is always possible to find a solution. For more information on how debt management plans work, read the rest of this guide.
Chapter 15:
Debt Management Plans for Young People
Chapter 17:
Debt Management Plan and High-Cost Loans
