The Government moved a step closer to regulating debt management companies today, as it launched a new consultation.

Around 150,000 people per year enter into debt management plans — where a borrower arranges with creditors to make smaller, more affordable monthly loan repayments. The plans have been a lifeline for consumers in debt as the economy has worsened.

Charities such as Citizens Advice and National Debtline will help borrowers draw up the plans for free, but an increasing number of companies charge consumers for the service.

Whilst most lenders will agree to the plans and sometimes offer to freeze the borrower’s interest and charges, there is no obligation on lenders to accept the lower repayments and some fail to cooperate with customers in difficulty.

The Government’s consultation will explore whether there should be more consistent charges; the opportunity to pay off debts over time without forcing the borrower to sell their home; and protection from creditors taking borrowers to court.

The consultation will also examine whether debt management plans provide a fair deal for creditors, allowing them to receive a maximum return without wasting money chasing the debt.

Bridget Prentice, the Justice Minister says: “We aim to benefit both debtors and creditors, ensuring debts can be paid off without the vicious cycle of charges, interest, fees, confiscated assets and relentless creditor contact that can turn a debt problem into a debt nightmare.”

The consultation will decide whether or not regulated schemes should be introduced, or whether tighter non-statutory regulation of current schemes would be more appropriate.

Sue Edwards of Citizens Advice, the charity, welcomed the move. “Our evidence shows that there is a need for statutory regulation of debt management schemes. Self regulation hasn’t yet proved to be sufficient," she says.

“Where people have done everything they should to deal with the problem, they should be left alone to get on with making repayments. Unfortunately this isn’t always the case at the moment."

Tim Moss, head of borrowing at Moneysupermarket.com, agreed. "There are currently an estimated 800 debt management companies operating in the UK, some of which are one man in his bedroom type operations, acting under no law or guidance.

"Without regulation debt management companies are free to act in ways that are clearly harmful to the consumer and so I urge the government to ensure this consultation yields concrete results before the situation gets completely out of hand."