Can I keep my overdraft if I have a debt management plan?

If you start a debt management plan you might be able to keep your overdraft - but it's often not recommended.

There are a few reasons for this. Firstly, an overdraft is an unsecured debt (like a credit card or personal loan) - so any debt can actually be included in your debt management plan. You can choose not to include it (which would allow you to carry on using it), but this sometimes presents problems.

For example, to qualify for a debt management plan you must be unable to afford your monthly debt repayments as they stand. So if you tell your lenders that you can't afford their repayments, but carry on with your overdraft, your lenders may be less likely to agree to the new arrangement.

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Will I need an overdraft during my debt management plan?

Debt management plans are designed to be affordable. Debt management lowers your monthly repayments to a level that you can commit to until your debts are fully repaid. All your other essential expenses, like your mortgage or rent, petrol, food and bills, will be repaid as normal.

This means that you shouldn't strictly need an overdraft whilst taking part in a debt management plan. If there is a financial emergency that you would usually use your overdraft for, you may be able to agree a temporary break in your debt management plan.

If you'd like to know more about what happens during a debt management plan, click here.

Can I get a new overdraft during my debt management plan?

To be eligible for a debt management plan you have to be unable to meet your original debt repayments - which may mean you have missed or underpaid some months. This may have damaged your credit rating. Starting a debt management plan involves making more affordable payments over a longer amount of time - but reducing your monthly payments will also damage your credit rating.

All this means that it might be difficult to get further credit - including an overdraft - during a debt management plan or for a certain amount of time afterwards.

Can an overdraft damage my debt management plan?

If you owe money to your bank - for example a credit card, personal loan or overdraft - and fail to pay it back, your bank might enforce their 'right to offset'. This means that they could take what you owe them out of your income - which is legal as long as they don't leave you in 'financial distress'. The best way to avoid this is to move to a different bank account that is not associated in any way with your old one.

What else do I need to know?

Debt management can be a good way to make your debt repayments more affordable, but there are disadvantages. For example, your lenders might agree to freeze interest and charges on your debts - but if they don't you will be paying interest over a longer amount of time, which could be more costly.

Debt management may only be suitable for you if you still have enough disposable income to make a reasonable contribution towards your unsecured debts each month. If your debt problems are more serious, you might need a different debt solution. If you're not sure, it will really help to get some debt advice.

Fill in our debt solution finder and a debt professional will ring you back with some professional debt help.

Helen Gradwell

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