What is a Debt Management Plan?
A Debt Management Plan or DMP is what it says on the tin – a plan agreed with your creditors to repay your debts over a period of time by making regular, usually monthly, payments until all of your debts are cleared.
Who manages a Debt Management Plan?
You can manage it yourself in what you could call self administered Debt Management or DIY Debt Management if you like. Most people however use the services of a debt management company such as ourselves who offer financial advice or assistance and debt management services.
Can you apply for credit when in a Debt Management Plan?
Yes, you can. A Debt Management Plan is an informal process and not a legally binding process, so you cannot be prevented from obtaining new credit while in one. However, it is against the spirit of the DMP that you should do this because when you entered your DMP, you committed to using all of your disposable income for the purpose of repaying the debts you started out with. Now you are taking on more debt before your original debts are paid off and your original creditors who agreed to the DMP are likely to take a dim view of this. They may renege on the agreement and pursue you vigorously for early repayment of your debts to them, applying interest and penalties as if the DMP had never been set up.
All unsecured debts such as loans, credit cards, store cards and bank overdrafts are covered and your DMP will allow for regular payments of these debts. However, you first need to allow enough of your income to go towards full payment of your priority debts first and to make sure you do not fall behind on any of these. Priority debts would be things like your mortgage or rent, council tax and your car HP.
How long does Debt Management last?
The length of a Debt Management Plan depends on your personal circumstances. Your household income, living expenses and of course the amount of your debts are all factors in determining how long your plan will last. If you use a debt management company or a debt advice charity to assist you, they will be able to work out the likely term of the DMP once they know what your regular monthly payment is likely to be. The term can extend to over ten years in some cases.
What are the advantages of a Debt Management Plan?
- Creditors prefer debt management to other processes for resolving your financial difficulties.
- You do not have to release equity from your property.
- You will repay all of your debts over time.
- Your details will not be put up on the Insolvency Register.
- You only pay what you can afford.
- Your DMP is designed to suit your personal circumstances and needs.
- In some cases you could have your interest and charges frozen.
How much does a Debt Management Plan cost?
Debt management companies’ fees vary from one to the other. Many of them charge a set up fee equal to the debtor’s first monthly payment into the DMP. This means that creditors will receive nothing for that first month. Thereafter, charges are usually a fixed percentage of the monthly payments being made by the debtor. The average monthly charge is 15% with a minimum charge of perhaps £25 per month and a maximum charge of perhaps £100. As you shop around, you will find that charges vary. Ask the companies that you are considering using what their charges are.
How does Debt Management affect your credit rating?
Your defaults will be recorded on your credit file. This may already have occurred if you have already missed making contractual payments on your debts. And because your debt management company has negotiated reduced monthly payments to your creditors in your DMP, it means that you will no longer be making the contractual payments originally agreed, in other words you are defaulting. The credit reference agencies retain such records for six years.
What happens if your circumstances change during the Plan?
Because Debt Management is flexible and informal, it is not as rigid as other processes. Your DMP company will usually assign a contact or liaison officer with specific responsibility for your DMP. Know who your contact person is and keep them fully aware of your circumstances at all times and particularly in relation to any direct correspondence or contact from your creditors or any changes to your income and expenditure.
Your DMP company should contact your creditors and communicate any issues that arise from your changed circumstances and propose solutions that satisfy them and that suit you. Of course if your circumstances have improved, you may be able to repay all of your outstanding debts immediately or over a shorter term by increasing the monthly payments.
What are the alternatives to a Debt Management Plan?
There are many alternative courses of action if you are in financial difficulty. You should take advice so as to be aware of all of your options before you decide which way to go. Some of the most common alternatives are bankruptcy, an IVA (individual voluntary arrangement), a debt relief order, debt consolidation, asset sale & debt settlement and property remortgage & debt settlement. It may even be that financial assistance is available from a member of your family or from one of your friends.
Not necessarily. There are many good debt management companies offering their services which include negotiating with your creditors and who have a track record of getting offers accepted. However, creditors do not have to accept reduced payments or agree to freeze interest and charges and there is no guarantee that any existing or threatened proceeding will be suspended or withdrawn and any collection costs incurred by your creditors will normally be added to your debt. The debt management company that you choose to use will keep you informed of the progress of negotiations with your creditors.
Do you have to be employed to do a Debt Management Plan?
No, but you do need to have a source of income that is more than you require for living expenses. Most people who enter a Debt Management Plan will be employed. However, people who have recently become unemployed and who are actively seeking employment can consider offering their creditors a short term Debt Management Plan, particularly when they have good prospects of obtaining employment with a reasonable level of disposable income. People whose entire income is comprised of benefits can offer a DMP to their creditors. Since the level of disposable income is likely to be low, it may well be that an alternative solution such as bankruptcy or perhaps a debt relief order might be a more suitable and appropriate solution.
Will your employer find out about your Debt Management Plan?
Not normally. Any reputable debt management company will offer complete confidentiality and privacy in relation to your financial affairs. No information about you is disclosed to any outside organisations including your employer. Particular care is taken when making contact with you to ensure that others will not find out about your circumstances. Obviously you need to behave discreetly yourself in your communications with your creditors and with any third party advisor you choose to assist you in relation to your DMP, if you want to keep your DMP from the attention of your employer.
Do you have to be insolvent to enter a DMP?
No, you do not. It may be that your income combined with your assets are sufficient to pay off your debts in full in accordance with the terms of your contracts with your creditors but that there might be some unpalatable things that you would have to do. For example, you might have sufficient equity in your property to pay your debts but if you cannot obtain a re-mortgage, you might have to sell your home to realize that equity. A short term DMP might provide a means of postponing the sale of your home or giving you some breathing space until such time as you can obtain a remortgage on reasonable terms.
Do you need to open a new bank account if you do a DMP?
Yes, you almost certainly will have to open a new bank account. Most people nowadays have their wages/salary/benefits paid into a bank or building society with which they also have debts – such as an overdraft, credit card or loan. This can be quite messy when the DMP commences, since your existing bank or building society may seek to use all of your wages/salary/benefits to address the deficits in your accounts with them, to the disadvantage of your other creditors. So it is best to open a new bank account with a bank or building society that is not connected to your existing bank. You will have to ensure that your wages/salary/benefits are paid into this new account and that your priority payments (mortgage, rent, council tax, car HP etc) are made from the new account also. These steps will ensure that you remain in control of your income and that all of your creditors are treated on a fair and equitable basis.
What about your existing direct debits?
You will have to cancel in writing with your existing bank and with your creditors all direct debits in relation to the unsecured debts that are being entered into your DMP.
Why use a company like McCambridge Duffy to set up your Debt Mangement Plan?
While you can set up a DMP with your creditors yourself, most people use a provider in this process. There are two main reasons for this. Firstly, people who are encountering financial problems are uncomfortable in trying to deal with their creditors directly. Secondly, creditors themselves often prefer to deal with a service provider who understands the need for efficiency and proper structures in managing a DMP without the emotion and personal upset that dealing directly with a distressed debtor may involve. The knowledge and experience built up by service providers, in dealing with creditors over many years, offers debtors a degree of assurance and confidence that their DMP will be managed smoothly and with the minimum of hassle and unwanted communications from creditors. Some Providers might have a better chance of getting interest and charges frozen on your DMP because of their frequent dealings and relationships with various creditors.