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Help Guide for a Debt Management Plan in the UK

If you are finding it difficult to keep on top of your credit card, loans, and store card repayments, then it is time to take charge of these finances before they spiral out of control.

If you have missed a few repayments and need help getting back on track, then you might want to consider taking out a debt management plan (DMP).

Follow this comprehensive guide as we talk you through everything you need to know about debt management plans and whether it is the right solution for you to tackle your existing debt problem.

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What is a debt management plan?

A debt management plan can be used to help you pay off your debts. It is not a legally binding agreement and is set up by you and your creditors to pay off nonpriority debts.  These can include loans, credits cards and store cards.

The debts are paid back by setting up one monthly payment, which is allocated between all your creditors.

It is handled by a debt management company, so it takes away the stress of you having to communicate with your creditors.

Am I eligible for a debt management plan?

There are no restrictions in terms of what your debt level is, but you do need to consider a few things when applying for one.

A debt management plan is good for people who are struggling with their debt repayments but can still afford to make regular smaller payments over a longer period of time.

Is a debt management plan right for me?

It’s important to remember that everyone has individual circumstances and requirements. A debt management plan can be beneficial if:

  • You have a source of income – if you have a regular income and you can keep up with your living costs such as food and shelter but are unable to pay your credit cards debts or loans, then a DMP is a good option
  • You want someone to deal with your creditors – the stress of being in debt is bad enough so the last thing you need is having to communicate with creditors about your financial situation. Therefore, assigning a good debt management company helps to alleviate the stress.
  • You want one monthly payment set up for your debts – it is often more manageable to have one monthly payment coming out of your bank than numerous ones to help you manage your budget better.

When is a debt management plan not right for me?

A debt management plan is not something to consider for the longer term.  However, there are some drawbacks to consider:

  • Not all your debt is included – DMPs only focus on unsecured debt so if you are looking for help on secured debt such as a mortgage then a DMP is not the right option. Instead, there are other debt solutions
  • If you are thinking of getting more credit – Debt management companies will not allow you to get more credit such as credit cards. They will expect you to cancel your current credit card accounts to show a commitment that you are changing your current spending habits and making paying your debts a priority.

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What debts can I pay off with a DMP?

A Debt Management Plan is designed to help you pay off your unsecured debt at a more affordable rate. Debts that can be paid off with a DMP include:

  • Personal loans (but not hire purchase agreements unless the item has been returned)
  • Credit cards
  • Catalogues
  • Store cards
  • Overdrafts

What debts can’t I pay off with a DMP?

Debt management plans can not be assigned to secured debts or what we call priority debts.  These are debts that have been secured on your assets which could include your home.  Debts that cannot be designed for DMP are:

If you are struggling with paying your secured debts, then head over to our debt help page to find out what the best solution is for you.  If not, speak to our experienced advisors so we can recommend the right debt solution for you.

How do I set up a debt management plan?

Setting up debt management isn’t complicated, but it is crucial to understand the steps involved so you are prepared when speaking to a debt management provider.  Here are few things you will need to help you:

  1. Decide whether a DMP is a right solution for you. Think about what debts you are trying to pay off. If they are things like credit cards, unsecured loans, or store cards then a DMP will work for you.  Then, ask yourself whether you are fine to get assistance from a debt management company and have manageable monthly payments.  All these vital points need to be taken into consideration.
  2. Work out your budget. We often get into financial difficulty when we don’t budget so this is a good place to start. A DMP provider will help you work out your budget, but we often think it is best to sit down and work this out yourself.  Download our handy budget planner to get you started.
  3. Choose a DMP provider. There are many DMP that will charge a fee to help you set up the DMP, but some will do it for free.  Each has its benefits but make sure you do your research.  Find out more about this in our section, on what I need to look for when choosing a debt management company.

What types of debt management plans are there?

Debt management plans can vary for different levels of debt. If you have a higher amount of debt, this is something that needs careful thought as it will take a lot longer to pay back your debts. However, if you can pay back an agreed affordable amount each month, it may take some time.

Your creditors may agree to freeze interest and charges (but this is not guaranteed) which could reduce the amount you pay back overall.

The amount you may pay back each month will be considered carefully.  Your DM provider will look at your existing household bills so that the payment is within your current means. The amount will also be reviewed regularly to make sure you can still afford your repayments.

There are both free and fee-paying debt management plans. Both may appeal for different reasons and you should carefully consider the differences in the service you may receive and how long each could take you to repay your debts.

You could write Off Your Unaffordable Debt

 

What do I need to look for when choosing a debt management company?

There are a lot of organisations that offer debt management plans, but it is good to choose the right one for you.  Make sure you feel comfortable with talking to them as ultimately, they will be handling your money and finances.

Finding a DMP provider

You can find a DMP provider by:

  • Asking the National Debtline for a referral
  • If you’ve already had debt advice and counselling, then your advisor might offer you a recommendation.
  • Ask friends and family as they might have some good recommendations for you.
  • Search debt counselling or help forums and see if there are any recommendations for you.

Questions to ask your DMP provider

Once you have looked at possible DMP providers, do some research and be sure to ask the right questions.  Here are some important questions you might want to ask them:

  1. Are they FCA authorised?

If anyone is providing debt management advice, then you need to ensure that they are regulated by the FCA.  This includes companies that don’t charge a fee too.  FCA authorised means that they must meet minimum standards especially when things go wrong, and you are treated unfairly.  If they are regulated, then you can complain to the Financial Services Ombudsman.

  1. Are they a member of the DMP protocol scheme?

Some companies have signed up for this scheme, set up by the government insolvency service.  Even though the member is voluntary, you know that a company who follows these rules is ensuring that they meet the necessary requirements set up by the FCA.

  1. Are they a member of a trade association?

DMP companies that are members of a trade association with a code of practice are audited to make sure they follow certain codes of practice.  This is especially necessary if you make a complaint, and it is not dealt with accordingly.  You can then turn to the trade association to investigate.

How does a debt management plan work once it is set up?

Your signed contract

A debt management plan should include a signed written contract.  It should detail the following information:

  1. What is the cost of the DMP
  2. What you will end up repaying for the duration of the DMP
  3. How long the DMP will run for

Explanation of your fees

If you are choosing a provider who will charge you a fee, make sure you are aware of what fees will be charged to you.

This should be included in your contract.  Check to see if the fees include an up-front fee, deposit or a monthly ongoing fee.

There are no rules in terms of how much you can charge for fees, but they do have to be open and transparent about the fees they are charging.  Make sure you are happy with what you are paying before you sign the contract.

Cancelling your debt management agreement

A DMP is not legally binding so you should be able to cancel it at any point, however often companies will not refund the fees you have paid before you cancel the agreement.

Just like any signed contract, check to see what the early repayment or cancellation rights are for the DMP.

Management of your debt management agreement

Communication is key, so find out how a DMP company will keep in touch with you.  Often you will get a good idea of how efficient and knowledgeable a company is by your initial call and how easy it is to get through to them.

If the process is handled professionally then you know that the after service will also hold you in good stead.

Often a debt management company, especially the fee-paying ones will offer you a nominated account manager to assist you through the process.

You could write Off Your Unaffordable Debt

 

What rules are there when taking out a DMP?

Taking out a debt management plan is often the step in the right direction to free you from the shackles of spiralling debt, however, although a debt management plan is not legally binding like an IVA or insolvency it is still important to take things seriously.

Keeping up to date with your payments and communicating with your creditors if your circumstances change is key.  They are acting on your behalf to negotiate a payment proposal which benefits you, so below are some rules you should follow:

Try not to take out extra credit

Most DMP providers will advise you not to take out extra credit.  This is because any extra credit payments could make it difficult to keep up with your regular agreed payments.

As your debt management plan is an agreement with your creditors to take priority in getting your debts paid off, it is likely that they will be unhappy if you decide that you want to pay off credit to a new creditor.  They may even take out legal action against you.

Taking out debt that you know you can’t pay for is also fraudulent.  These debts can not be added to your DMP as you took out this form of credit knowing that you would have difficulty paying it back.

It is always tempting to get more credit, especially as you feel it will ease the burden on you struggling with money in the short term but consider the consequences.  A DMP has been put in place to manage your finances.  By adding weight to this, it can only be harmful to your current debt situation so avoid this at all costs.

Be honest about your spending from the start

One rule when taking out a DMP is, to be honest with yourself and your debt advisor.  Before you start breaking the rules, which could land you into further debt, be transparent of your incomings and expenditure.

After your advisor has gone through all your essential living costs, the money left over will go into your DMP.

Often people are reluctant to say how much they spend on things, especially themselves.  Don’t say your clothing costs are £20 when in fact they are £40.  You will fall short every month which could mean you are turning to other forms of credit.

Be honest about unexpected bills

Sometimes in life, things don’t always go to plan, no matter how diligently we plan.

Get in touch with your DMP provider if you receive an unexpected cost such as a home emergency cost.  We have all been there when we must call out a tradesman to fix a home emergency.  Let them know your situation and they may offer you a short payment holiday to get you back on your feet.

However, if your income changes, such as a change in job or loss of income then you should speak to your DMP provider immediately.  You will probably have to change your regular payment amount.  You can speak to your DMP provider to do this but if you make smaller payments then it will take you longer to pay them back.

Does a debt management plan affect my credit score?

Unfortunately, a debt management plan will affect your credit file and score.  As you are paying less than the minimum repayment amount you agreed when you took out the debt this will show up on your credit report.

However, once you have completed your DMP, you then could start building a good credit score again.

Does a DMP show up on a credit report?

  • Yes – if you are paying less than the minimum payments to your creditors then this will be recorded on your credit file.
  • No – If you’re still paying the full contractual amounts to your creditors then your DMP will not show up on your credit report.

How long does a DMP stay on my credit file?

Court actions, defaults, partial payments and missed payments are recorded on your credit file for six years.  Read our article on how you can improve your credit rating.

Do miss payments have a serious impact on my credit file?

If you miss a payment or pay less than the agreed minimum payment, this could have damaging effects on your credit rating.  Therefore, setting up a debt management plan, and making reduced payments shows creditors that you are taking the necessary steps to deal with your financial situation.

Can I make improvements to my credit rating when I am on a DMP?

There are few steps that you can take during your debt management plan to improve your credit score.

  • Check your credit report regularly – Sometimes, a score can be bought down if there is misinformation on your report. It is important to scrutinise as this is your financial reputation at stake.  Don’t be afraid to contact your creditors and clarify certain marks on your file.

CCJs are a good example of how creditors may assign a black mark on your file by accident.  Find out about CCJs and CCJ discharged here.

  • Register yourself on the electoral roll – The reason for this is that lenders will clarify that all your personal information is up to date.
  • Pay your bills on time – This is when your budgeting comes to fruition. If you get a better understanding of your outgoings such as your gas, electric and water bills then you will make it an important task to pay those bills on time.  Setting up a direct debit is the easiest and efficient way to do this.

 

What information will show up on my credit file during a DMP?

When you are looking at your credit report, it is important to note all the ‘markers’ that show up on it.  Some of these ‘markers’ are more serious than others so let’s find out more:

DMP flag or marker

There is no general place that shows that you have a DMP in place, however, each creditor account that is included in your DMP may have a marker added to show that you are making a repayment.

Defaults

If you have defaults or miss payments then your creditor will add these details to your credit history.  This will stay on your file for six years.

Payment History

Your credit file will keep a log of the debt payments you have made up to this point.  DMP payments can often be partial payments, so this will show up on your credit history.

County Court Judgement (CCJs)

If you receive a CCJ, then details of this will be shown on your credit history for six years.  However, if you have a CCJ discharged, which means that you paid the amount owed within a month of receiving your CCJ, then this should not appear on your credit file.  Read more about CCJs here.

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Get help with debt management

Applying for debt management is a good way to control your current financial situation.  It is important to consider all the aspects detailed in this guide, however getting expert advice is just as crucial.

Money Advisor has a team of experienced advisors to offer you guidance on the best debt solution for you.  If you need help with managing your debt or are facing financial difficulty, then get in touch with us today.

FAQ

Need more info? Here are a few of our most frequently asked questions on this topic. If you don’t see the answer you’re looking for here, give us a ring – we’d love to help.

Do I need to pay to get a debt management plan?

Many debt management plan companies charge a fee for their services, but some don’t. You don’t have to pay a fee, and you can choose a free provider such as Money Advisor.

Is it better to use a fee paying DMP company?

This option is entirely on personal choice. Of course, no one likes to pay anything more than they need to when they are already in debt, however, DMP providers who charge a fee will argue that you will get better service if you pay a fee.

This is because they are being paid by you rather than the creditors. They have your best interests at heart and will work out on your behalf to ascertain what you can afford to pay and negotiate payments with your creditors.

Can I do a debt management plan myself?

Yes, it is possible for you to do a debt management plan yourself.

However, it is important to note that you will have to set up various forms of paperwork such as a Statement of Affairs, detailing your financial circumstances as well as managing and reviewing your monthly payments. It requires a lot of organisation and determination.

Does a DMP affect my rental agreement?

If you are renting that it is unlikely that your current landlord will be told about your DMP, however as rent comes under living costs it is important to pay any rent arrears in full or come to an arrangement to pay them accordingly.

Can I get a new tenancy agreement during a DMP?

Generally, a landlord will do a credit check to see your current financial situation. Starting a new tenancy can prove to be difficult as some landlords will check your credit file.

If a landlord notices you have missed payments or have any other negative information on your credit file, then they will be less inclined to give you an agreement.

A landlord will always need to check with you first and get you to sign a consent form before they agree on doing a credit check, however, not all landlords will perform credit checks.

Especially local authorities or housing associations but smaller private landlords will often check.

Private landlords may still agree to let out their property to you regardless of your credit history if you provide them with a guarantor with a good credit rating or pay a larger deposit.

Can I get a new mortgage during a DMP?

It is difficult to get a new mortgage while on a DMP. Your debts will be considered as a negative when making a mortgage application and in addition to this you might struggle to get a deposit together whilst you are in a DMP.

It is important to speak to a qualified mortgage advisor to find out more regarding your situation.

Will it be difficult for me to re-mortgage whilst on a DMP?

It could be harder to re-mortgage when on a DMP, however getting a mortgage deal will depend on various things such as how much negative information is on your credit file, what your current income is and how much you have left to pay on your mortgage.

It is important to speak to a qualified mortgage advisor to find out more regarding your situation.

Does my DMP affect people I live with?

Your DMP will only affect people who have joint debts with you. Quite often these are your partners who have a joint loan, bank account or household bills.

If this is the case, then your credit files will include something called ‘financial association’.

This record of making reduced payments may affect the other person’s credit file and their ability to get credit.

Can I get some expert help and advice?

Yes of course. Our team of advisors are here to help answer any questions you might have regarding debt management or any other debt solution. Get in touch for more information.

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