Debt Management Plan
What is a Debt Management Plan (DMP)?
A DMP is an agreement, negotiated by you or a third party, to lower your monthly payments to creditors.
It isn’t legally binding, unlike other debt solutions, such as an Individual Voluntary Arrangement (IVA) or a Trust Deed. With DMPs, your monthly payments are proposed based on what you can ‘reasonably afford’.
A ‘reasonable amount’ is calculated by completing an income & expenditure review and checking the breakdown of your monthly budget.
Payments are usually paid over longer periods of time.
Payments can also be revised should your circumstances change. This makes a DMP a flexible solution.
Unlike some debt solutions, a DMP sees you repay your debt in full. Your creditors may also agree to freeze interest and fees on the debts included, but this is not guaranteed.
If you opt to go for a private debt management company, they will charge you a fee for negotiating and administering your DMP.
However, there are some debt charities that offer the service for free.
If your creditors agree to the reduced payments offered, all you need to do is keep up with your payments.
How does a Debt Management Plan work?
The exact nature of a DMP varies from case to case, but these are the main steps:
Select your DMP provider
If you opt to use a DMP company, an adviser will represent your interests, and remove the stress of direct contact with creditors.
A number of debt charities offer DMP services free of charge.
Calculate your budget
It’s important to work out how much you can afford to pay in your monthly instalments, by carefully reviewing your budget.
If you choose to use a DMP provider, this will involve providing pay slips, bills, and other documents. After the essential income/costs have been established, it is easier to calculate the repayment amounts that you can afford.
Submit a suggestion to creditors
Your budget will be shown to your creditors, who will decide whether or not to accept your new monthly payments schedule.
If accepted, they may also agree to freeze ongoing interest and/or charges as a gesture of goodwill.
If rejected, you may be eligible for an alternative solution, such as a Trust Deed or Individual Voluntary Arrangement, bankruptcy or sequestration.
Make your new monthly payments
The final step is to make your new monthly payment.
You do not have to wait for your creditors to agree to your DMP before you start making reduced payments, however, you may have to review your situation if they later reject your plan.
If you choose to use a DMP provider, you will make your monthly payment to them rather than directly to your creditors. Having only one payment rather than several, can make things more manageable.
How long does a Debt Management Plan take to set up?
One of the benefits of a DMP is how quickly it can take effect. You should be able to consolidate your debts into one monthly payment and reduce the amount you have to pay almost immediately.
Once you have calculated your budget and decided how much you can reasonably afford to pay towards your debt each month, you can start making that payment straight away.
The monies will be spread evenly among your creditors, and you don’t have to wait for your creditors to agree to the plan before going ahead with it.
While a DMP gives you almost instant debt relief, you should be aware that your creditors may continue to request payments from you even after you have begun paying towards your DMP.
Your creditors will need time to review your proposal, agree to it, and update your information on their systems.
If your creditors contact you, you can simply respond that you have already sent them a proposal for their consideration and that you are now paying back the amount set out in that proposal.
Am I eligible for a Debt Management Plan?
There’s no maximum or minimum debt level needed to enter a DMP, but there are some things to consider before applying:
- A DMP is appropriate for those struggling to keep up with their debt repayments, but who can afford to consistently pay smaller amounts over a longer period of time.
- They are also appropriate if your circumstances are likely to improve over time and have a steady and relatively stable income.
- Before applying for a DMP, you should ensure that can afford to pay your priority bills, such as your mortgage/rent and council tax, which should all be included for in your income & expenditure review.
What debts can be included in a Debt Management Plan?
Not all debts can be included in a DMP; it’s designed to help with non-priority debts. Debts suitable include:
- Personal loans
- Credit card debt
- Bank/building society loans
- Payday loans
- Store cards/credit
- Money borrowed from friends/family
Debts that are unsuitable for a DMP include:
- Council tax
- Income tax
- Court fines
- National Insurance
- Hire purchase contracts for essential items
- Child support or maintenance
- TV licence
- Utility bills
Does a Debt Management Plan hurt your credit?
It’s important to be aware that entering into a DMP will usually have a negative impact on your credit score – the three-digit score that reflects your chances of being accepted for credit in the future.
When entering into a DMP, you’re agreeing to pay a lower amount towards your debts each month than would normally be expected. While this helps lower your costs, reduced payments will show up in your credit report.
This can signal to lenders that you’re someone who has difficulty paying back what they owe. The consequence being a lower credit rating.
It’s important to bear in mind that failing to pay back your debts will hurt your credit score anyway. Even though a DMP might impact your credit score in short term, it could still be the appropriate way for you to move towards long-term financial stability.
What are the advantages of a DMP?
- As it is an informal solution, your DMP won’t be recorded on an Insolvency Register.
- A DMP shows you are willing to pay your debt in full, so your creditors will look at this more favourably.
- Creditors can freeze interest and charges on your debts.
- Most DMPs are flexible – allowing changes to be made if your situation changes.
- DMPs reduce your monthly payments.
- Reduced contact with your creditors if you opt to use a third party.
What are the disadvantages of a Debt Management Plan?
- It can take a long time to pay back your debt.
- It’s not guaranteed that creditors will freeze interest and charges.
- You are still liable for your full debt level.
- No guarantee that your creditors will accept the offer of reduced payments.
- Creditors can still take legal action against you.
- Creditors are not obligated to stop contacting you, unlike other debt solutions like IVAs or Trust Deeds.
- Some private DMP providers will charge fees for the service, which can extend the length of the DMP.
- Your credit score could be negatively impacted, making getting further credit more difficult and expensive.
Is a Debt Management Plan a good idea?
Ultimately, whether a DMP is a good option for you depends on your situation, but there are some broad criteria that might make you a good candidate.
If you are currently struggling to cover the cost of your monthly debt repayments, can’t keep on top of payments to multiple creditors, or you’d like a third party to deal with creditors on your behalf, a DMP may well be an option worth exploring.
If you are struggling with debt and looking for some advice, call us today on 02895 380906. One of our experienced debt advisers will be happy to help you find the right solution for your financial circumstances.
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We work closely with several local debt charities including adviceni.com and ruralsupport.org.uk providing training and support. Linda Wilson, our Voluntary Sector Services Manager works closely to ensure that our services are accessible to those most in need.