If your debt is mounting and you’re falling behind on your repayments , its time to be proactive and consider debt solutions through which you can regain control of your finances.
One debt relief option, worth looking into, is debt management plan also called DMP. A DMP program might help you take charge of your debt crisis and secure a stable financial life.
Here, we explain what a debt management plan is, its pros and cons and the eligibility criteria. Based on this information and your specific circumstances, you can decide whether a debt management plan will work for you as an effective debt solution.
What is a Debt Management Plan?
A debt management plan (DMP) is an informal agreement between you and your creditors, where you arrange to repay your debt at a more affordable rate by making lower monthly payments. Your creditors may also agree to freeze your interest and additional charges but that is entirely up to them.
Because debt management plans are informal, they offer a greater measure of flexibility compared to some of the other formally binding debt solutions like individual voluntary agreements (IVAs) and bankruptcy. This means that you can usually revise your monthly repayments if your circumstances change or opt-out of the DMP altogether (though not without consequences).
Debt management programs, originally an American concept, were introduced in the UK by a charity called the Consumer Credit Counselling Service (CCCS) back in 1990s in a bid to provide support to debtors who defaulted, at a time when the personal credit market was experiencing a boom.
Like most debt solutions, debt management plans cover only selective debts:
Types of Debt Covered
Debt management plans can only be used for non-priority debts such as:
• Your Overdrafts
• Your Personal Loans
• Money You Borrowed from Friends and Family
• Bank or Building Society Loans
• Credit Card, Store Card and Payday Loans
• Catalogue, Home Credit or Store Credit Debts
Types of Debt Not Covered
Debt management plans do not cover priority debts like:
• Gas and Electricity Bills
• TV Licenses
• Court penalties and fines
• Child support
• Council tax
• VAT, National Insurance and Income Tax
• Loans secured against your residence
• Essential hire purchase agreements
How a Debt Management Plan Works?
Since debt management plans are informal agreements, you can negotiate one with your creditors yourself or have a third-party negotiate it on your behalf.
However, most debtors save time and effort by relying on DMP providers such as FCA authorized debt management companies or licence charities, for negotiating a suitable repayment arrangement.
A debt management provider will formulate an affordable repayment plan by taking into account your circumstances, accumulated debt and factors related to your monthly budget such as your income, expenses and employment status. They will then pitch the new repayment plan to your creditors and negotiate with them on your behalf.
If your creditors agree to the proposed plan, you can proceed with repaying the money you owe at a rate you can afford. You will be expected to make a monthly payment to your debt management company or charity which will then disburse the amount to your creditors.
Pros and Cons of a Debt Management Plan
Debt solutions that work for one debtor may not work for another. That is because each debt management program comes with its own merits and drawbacks.
Debt management plans are no exception to this rule. So, if you want to make an informed financial decision, take a moment to weigh out the pros of debt management plans against their cons
Pros of Debt Management Plans
No record of your debt management program will appear on a public insolvency register
You can choose to opt-out of DMPs or alter your repayment plan if your circumstances change
Affordable Debt Payment
Debt management plan considers your monthly budget so you only pay what you can afford to pay.
One Standard Payment
With a DMP in place, you will only be expected to send through 1 reduced monthly payment to cover all your unsecured debts
DMPs are informal so there is no need for time-consuming and lengthy formal insolvency procedures such as an IVA or bankruptcy
Severed contact with creditors
You will have lesser contact with your creditors. If they still contact you, you can ask them to correspond with your debt management provider instead.
Possibility of reduced or frozen interest
Your creditors may agree to freeze the interest and charges on your initial debt.
A DMP sends out a positive signal to your creditors because it indicates that you are willing to pay your debt in full.
Cons of Debt Management Plans
Not Legally Binding
Debt management programs are not legally binding, which means creditors are not bound by any terms of contract; they can opt-out of the plan anytime
The decision to freeze your charges and interest is based solely on creditor discretion; your creditors are not legally obligated to freeze your interest and charges.
If your creditors refuse to freeze your interest and charges, you may end up paying more than what you currently owe. That happens because most creditors charge monthly, daily or yearly interest. DMP allows you to make reduced payments over a longer duration but also increases your overall accumulated interest.
With DMPs, all of your creditors have the power to veto your proposed repayment plan. A DMP can only be secured if each of the individual creditors agrees to its terms.
DMPs Last Longer
DMPs last longer compared to other debt solutions such as trust deeds or IVAs
A debt management plan would show on your credit history and affect your credit score for more than six years.
Creditors May Still Contact You
Some of your creditors may still contact you since they are not legally obliged to cease communication with you.
DMPs do not provide immunity against court action so your creditors can still sue you for unpaid money, e-g they may try to secure a county court judgment (CCJ) against you.
Is Debt Management Plan Suitable for Me?
Debt management plans are used to pay off unsecured debts. A debt management plan may be the right option for you if you have some extra money left every month after paying priority costs such as rent, mortgage, food, accommodation.
Debt management program may be the right option for you if:
• You can only afford to pay back a small amount to your creditors on a monthly basis
• You can make repayments within a few months
• You want someone else to deal with your creditors on your behalf
How Long Will It Take?
Typically, debt management plans take 5-10 years but the exact answer to this question depends on various factors such as:
The more you owe, the longer it will take to repay it. Higher levels of debt mean longer debt management plans.
Your Repayment Capacity
This depends on your disposable income. You can significantly reduce the duration of your DMP if your income is high and you can afford to repay your debt in higher monthly installments.
Interest and Additional Charges
The duration of your DMP will be considerably reduced if your creditors agree to freeze interest and charges on your principal amount.
Estimated Duration of Your Debt Management Plan [Steps Included]
Working out how long your debt management plan will last is fairly simple. Use the following step-by-step method to compute the total estimated duration of your DMP:
Step 1: Calculate Your Surplus Income
Calculate your monthly surplus income by adding up all your priority monthly expenses like food, accommodation, utility bills and taxes. Then subtract the total expenditure from your earnings (salary or total income).
Step 2: Work Out Your Total Unsecured Debt
Take a look at your debt record and add up all of your unsecured debts to get your total debt.
Step 3: Divide Your Total Debt by Your Income
Divide the total debt you just computed by your total surplus income to get the total amount of installments you will have to pay in order to clear your debts. Divide this figure by 12 to get the total number of years your debt management plan would last.
Let’s assume for a moment that John has to repay an unsecured debt of £10,000. He has a total income of £1300 a month. After adjusting his expense including his taxes and bills, he only has £200 left.
Here’s how long John’s debt management plan would last, assuming his interest and charges are frozen:
Step 1: Surplus income: £200
Step 2: Total unsecured debt: £10,000
Step 3: 10,000/200 = 50 months or 50/12 = 4.17 years
*This step-by-step approach makes two assumptions; your creditors have agreed to freeze your interest and charges and your debt plan is non-fee charging.
How to Get a Debt Management Plan?
Here is how to obtain a debt management plan:
Hire an FCA-authorized debt management company or consulting a debt charity. You can find a certified debt relief company by checking in the financial services register.
Your debt provider would work out your monthly payments after understanding your financial situation and taking into account your priority household costs.
The company would then contact your creditors and negotiate the plan with your creditors.
Get Help from Money Adviser
Money Adviser is committed to providing the best possible service to all those who need help with their finances. If you are struggling to make ends meet or perhaps have experienced a change in circumstances that have affected your ability to manage your finances, please contact us as soon as possible, we will complete a thorough, impartial examination of your individual situation and put you on the road to financial recovery.