Debt Management Plans (DMPs) are much in news reports currently. A few unfavourable issues with the sector made the biggest headlines. Like any enterprise a handful of bad apples can give the barrel a bad name. In Britain the Office of Fair Trading (OFT) has recently taken actions to handle the bad apples. Essentially the most significant offences it has identified took place in the areas of marketing and charging behaviour. In September 2010 it issued a warning to 129 debt management companies and followed that up with high profile enforcement actions against the worst offenders. The OFT plans to publish revised debt management direction in June 2011. It is not evident now whether or not the government plans to introduce any laws to control DMPs. Still the Ministry of Justice has circulated a consultation document relating to the way forward for DMPs. Three options for regulation are being offered. They are to marginally enhance regulation by the OFT, to introduce industry self regulation with voluntary codes of practice and/or to create a fresh solution i.e. a statutory DMP. Since the DMP is the predominant personal insolvency solution in the UK at the present time, it is perplexing that the government seems to shrink from the obligation of legislating in this area. So what is the current condition of national debt management advice and how can it give relief to debtors?
A DMP is an informal adjustable approach to solving a personal debt problem whereby creditors are remunerated in full over a period of time. The pace at which lenders are paid is dependent on what the debtor is able to afford and thus a DMP may last for a long time. It is possible to administer your own private DMP by working one-on-one with your creditors. Such self administered DMPs can be referred to as SA DMPs or DIY DMPs. Still, most people who enter into a DMP implement it with third party support, and make use of the services of a commercial debt management firm or one of a number of charitable enterprises. These include the CCCS and Payplan as well as CAB who can furnish excellent free advice and help.
Why would the financially struggling borrower utilize a third party service provider to help set up a DMP with creditors? There are two key reasons for this. Firstly, debtors are frequently awkward in seeking to contend with their lenders directly. Secondly, creditors themselves generally would rather deal with a service provider who is familiar with the necessity for efficiency and appropriate structures in managing a DMP but without the (understandable) sentiment and personal upset that working directly with a distressed debtor may entail. The information and experience accumulated by service providers, in working with lenders over many years, offers borrowers a certain amount of certainty and assurance that their DMP will be operated without problems and with the minimum of problems and undesirable contact from lenders.
Is it possible to obtain new credit during a DMP? Because it’s an simple process, you can not be prevented from getting hold of further credit when participating in a DMP. However, it is contrary to the nature of the plan that you should do this and creditors who may have agreed to your DMP at the outset might and in all likelihood will surely reject it assuming they discover that you have damaged the nature of the deal this way. The reason is , you have made a commitment to apply your entire disposable income to paying back your old obligations when you entered the DMP.
What debts are addressed by a DMP? All unsecured obligations that include loans, credit cards, store cards and bank overdrafts are covered. Your secured debts for instance your home loan or HP agreements are prioritized in your income and expenditure calculations, so that you do not go into default on these payments.
What are the great things about a DMP? Lenders usually have a preference for debt management to other systems for resolving monetary problems simply because sooner or later you will pay back your complete debts. From the debtor’s angle, there is no need to release value from property, you pay whatever you can afford, your DMP is put together to suit your unique circumstances and needs and your details won’t be put on the Insolvency Register.
Exactly how much should a DMP cost? It depends on who you use because debt management charges vary from one provider to the next. It will probably pay to shop around before you decide to decide on your provider. Most DMP service providers charge a set up fee equivalent to the debtor’s initial monthly instalment into the DMP. This means that lenders get nothing through the first month the DMP is running. After that, fees generally are a predetermined portion of the monthly instalment made by the debtor. The standard monthly charge is approximately 15% with a minimum of around £25 and a maximum of approximately £100. As you shop around, you will see that charges vary. To illustrate, if you go into a DMP and consent to make monthly payments of £300, your DMP provider keeps the initial installment of £300 in respect of set up charges and then it charges £45 per month. It distributes the remaining £255 to your lenders on a pro-rata foundation.
What is the effect of entering into a DMP on the debtor’s consumer credit rating? The truth is that the credit rating may possibly already be impaired if the debtor has defaults of repayments or a track record of missed repayments or late payments. The debt management company negotiates diminished monthly installments with lenders, and therefore the initial contracts will end up being broken. Non-payments are often recorded on the debtor’s credit file and credit reference agencies keep such information for a minimum of six years.
Does a debtor really need to be insolvent to enter a DMP? No, it isn’t a necessity to be insolvent. It might be that the debtor’s income combined with any assets they may have is enough to settle all financial obligations entirely in accordance with the terms under which the funds were loaned. However, the debtor could be reluctant to carry out some unpalatable things to settle the debts. By way of example, there could be adequate value in the debtor’s property to settle the debts when combined with the debtor’s income. It could entail selling the family home to release the equity if the debtor is unable to obtain a remortgage or if the conditions of a sub-prime remortgage are prohibitive. A DMP could very well offer a method of delaying the sale of the family home or offering the person some respite until such time as a remortgage can be arranged on affordable terms.
Must lenders settle for the debtor’s proposal of monthly payment in a DMP? There are plenty of DMP companies with long expertise in negotiating with lenders and with a good reputation for getting offers approved. Nevertheless, lenders do not have to agree to decreased repayments or stop interest and charges and there’s no guarantee that any existing or threatened legal exercise or case is going to be terminated or withdrawn. What’s more, any debt recovery expenditure incurred by a lender is normally added to the debt. The DMP service provider will keep the debtor up to date relating to the situation and progress of negotiations on lowered payments.
Will a debtor have to be in work to be accepted into a DMP? No, yet it is required to have a form of income which is higher than what is necessary for living costs. Most people who enter a DMP are employed. At the same time, consumers who have lately become unemployed and who are actively looking for work could certainly contemplate offering their creditors a short timeframe DMP, especially if they have strong prospects of getting a position with a acceptable amount of disposable income. Even though people whose total income is comprised of benefits can put forward a DMP to their creditors, the quantity of disposable income is probably going to be very low and it may well be that an alternative way to go for example bankruptcy or perhaps a Debt Relief Order may be a more suitable and most appropriate solution.
Are employers informed with regards to their workers getting into a DMP? Respected DMP companies offer total confidentiality and privacy relating to the financial affairs of debtors. No information about the consumer is revealed to any outside firms or other people such as debtor’s company. Special care is taken when making contact with the consumer to make sure that others will not discover the debtor’s problems. Needless to say the debtor should certainly operate prudently in communications with creditors and with any other advisors to be sure that the DMP is not accidentally revealed to the employer.
How long does a DMP continue? That really is dependent upon the debtor’s personal situation. However, the DMP company should be able to determine how long the plan is probably going to last, once it has acquired all of the debtor’s personal data especially the volume of the debts and the debtor’s disposable income. Seeing that all of the debts are to be cleared entirely, the time period of the DMP may very well be quite extensive.
Does the consumer need to open a new bank account when signing up for a DMP? Yes, almost definitely. Most people nowadays get their wages/salary/benefits paid into a bank or building society with which they also have borrowings – for example an overdraft, credit card or loan. This may be fairly messy once the DMP begins, given that the pre-existing bank or building society might possibly seek to use all of the debtor’s wages/salary/benefits to deal with the deficits in the debtor’s accounts with them, to the disadvantage of the debtor’s other lenders. So, it is recommended to open a new bank account with a bank or building society that is not attached to your existing bank. The consumer needs to make sure that wages/salary/benefits are paid into the new account and that priority payments (mortgage, rent, council tax, car HP etc) are made out of the new account also. Any direct debits with the debtor’s existing bank need to be terminated in writing and pertinent lenders advised. These actions ought to ensure that the debtor continues to be in control of his or her income and that all lenders are treated similarly and on a fair and equitable basis.
What will happen if the debtor’s circumstances transform while in a DMP? Since a DMP is flexible and informal, it is not as strict as other processes. The DMP provider will normally have assigned a contact or liaison officer with particular responsibility for the debtor’s DMP. The consumer ought to know who that contact individual is and keep them thoroughly aware of their circumstances at all times, especially in relation to any direct correspondence with or contact from creditors or any alterations to income and expenditure. The DMP provider should then speak to creditors and explain any issues that develop as a result of such changed circumstances and offer remedies that meet the needs of the borrower and creditors.
What are the alternative options to a DMP? alternative courses of action available to anyone in financial difficulty who is searching for relief. The borrower should be aware of all available choices before choosing which strategy to use. Some of the most common other possibilities are Bankruptcy, Individual Voluntary Arrangement, 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 the debtor’s family or friends.