What is a Debt Management Plan?
A Debt Management Plan or DMP for short, is an informal debt solution designed to help you pay back your debts by means of affordable monthly repayments. In the plan your debts are paid back entirely, or until you decide to opt out of the plan. The speed at which you pay creditors depends on how much you can afford to pay each month and whether or not interest and charges are frozen. It is for this reason that Debt Management can last for a long period of time in some cases. If you use the services of a Debt Management Company to assist you in setting up your plan, they will be able to determine how long it will last for, after they have received all information about your circumstances.
How do I enter into a DMP?
There are two ways to set up a DMP.
- You can use the services of a Debt Management Company or Charity who will set up and manage the DMP on your behalf.
- You can set up a Debt Management Plan yourself and conduct business directly with creditors. This type of Plan is sometimes called self administered Debt Management or DIY Debt Management.
Most people engage the services of a Debt Management Company or of one of the not for profit organisations that offer free guidance and support for Debt Management. These companies generally have more sway with the creditors and can have a better chance of getting interest and charges frozen than if you try yourself. If you are choosing a company, it’s best to shop around amongst the commercial debt management firms to make certain that not only is the best guidance obtained but the full variety of financial remedies is adequately investigated and researched. Fees and charges can vary greatly between different companies.
Can I obtain further credit in the plan?
Because Debt Management is an informal solution, your lenders can’t keep you from obtaining more credit whilst in a DMP. However, it is not advised to do this and is seen as being contradictory to the spirit of the plan. Creditors who have accepted your DMP in the beginning will almost certainly reject it if they find out that you’ve harmed the nature of the agreement in this manner. This is because whenever you entered the DMP, you committed to employ all of your disposable income to address and settle your pre-existing liabilities.
What debts are covered in a DMP?
All unguaranteed debts such as loans, credit cards, store cards, payday loans and bank overdrafts can be incorporated into a DMP and you are expected to settle all of these kinds of obligations eventually.
In contrast, your secured debts such as your mortgage or HP agreements are prioritised in your income and expenditure computations, so that you do not go delinquent on these obligations. All secured liabilities have to be paid in full on a continuous basis and you cannot fall into arrears with them.
DMP Pros & Cons
The key benefits of Debt Management can be summarised as follows:
- creditors prefer Debt Management Plans to other systems for handling financial problems for the following reasons:
- you don’t have to release equity from property
- you will pay back all of your debts
- your fiscal information will not be placed onto the Insolvency Register
- you just pay precisely what you can afford and the DMP is made to match your personal situation and needs.
Remember though, lenders don’t have to
- consent to reduced repayments
- freeze interest and charges
- stop any proceedings such as using debt collection services
If you use a Debt Management Company to manage your DMP you usually have to pay charges. These charges fluctuate somewhat from one firm to another. Charges are generally a set percentage of your monthly payment. An average monthly fee is 15% with a minimum of about £25 and a maximum of about £100. As you shop around, you will see that costs vary greatly. Some firms charge unfair upfront set up payments too for managing your plan.
What happens to my credit rating?
Entering into a Debt Management Plan detrimentally affects your credit rating. However it is quite possible that your credit rating has already been affected if you have arrears on your credit accounts or if you’ve got a record of missed payments. Your Debt Management Company makes the offer of reduced monthly payments to your creditors which means that you will no longer be making the payments initially agreed upon. Therefore the original contracts into which you entered with your lenders will be broken. Records of these non-payments may and probably will be created on your credit file. The credit reference agencies retain delinquency data for six years.
Can I change my monthly payments?
Since a DMP is flexible and informal, it isn’t as rigorous as other processes and for that reason can respond promptly in case you undergo a transformation in your circumstances, for better or for worse. If this happens, you should call your DMP Company and inform your liaison officer of any changes particularly with regards to your income and expenditure or direct communications from your creditors. Your DMP Company can contact your lenders, communicate any problems that arise from your changed situation and suggest solutions that satisfy both you and your lenders.
Do I have to be employed to do a Debt Management Plan?
While many people that enter a DMP are employed it’s not necessary to be, so long as you’ve got a source of income that is greater than you need for living expenses each month. However, people who have recently come to be unemployed and who are actively in search of work might look into offering their creditors a short term DMP, especially when they have got decent prospects of gaining employment with a decent level of disposable income. Even people whose total income is comprised of benefits can offer a DMP to their lenders but because their level of disposable income is likely to be low, it may well be that an alternative remedy such as Bankruptcy or perhaps a Debt Relief Order may be a more suitable and relevant remedy. Other solutions to financial difficulties that can be considered include an IVA (Individual Voluntary Arrangement), Debt Consolidation, Asset Sale & Debt Settlement and Property Re-Mortgage & Debt Settlement. The possibility of financial assistance from a family member or friend ought not to be forgotten.
Is my plan Private and Confidential?
Good Debt Management Companies provide complete confidentiality and privacy in relation to a DMP. No data about you is disclosed to any outside organisations including your employer. Particular care is taken when making contact with you to make sure others will not learn about your circumstances. Of course you have to conduct yourself cautiously in your communications with your lenders and with your Debt Management Company to make sure that your employer does not discover your DMP inadvertently.
Do I have to be Insolvent?
No you do not. Insolvency is not a necessity for entering a DMP. It may be that your income combined with your assets is enough to pay off your liabilities in full in keeping with the terms of your agreements with your lenders. To illustrate, you might have enough equity in your property to repay your debts when your income is considered but if you can’t obtain a re-mortgage, you might have to sell your home to produce that equity. A DMP may possibly give a way of delaying the selling of your property or provide you with a little breathing space until such times as you are able to get yourself a re-mortage on acceptable terms.
To read more about Debt Management you can check out our FAQ section on our website. You can also visit StepChange who are a provider of free Debt Management Services.