Debt Management Plan

WHAT IS A DEBT MANAGEMENT PLAN (DMP)?

A DMP is an informal agreement between you and your creditors for paying back your non-priority debts. Non-priority debts are things like credit cards, loans and store cards. You pay back the debt by one set monthly payment, which is divided between your creditors. Most DMPs are managed by a DMP provider who deals with your creditors for you. This means you don’t need to deal with your creditors yourself. A DMP is not legally binding, meaning you’re not tied in for a minimum period and can cancel it at any time.

Is a DMP right for you?

A DMP may be a good option if the following apply to you: You can afford the monthly repayments on your priority debts (such as mortgage, rent and council tax) and your living costs, but are struggling to keep up with your credit cards and loans you would like someone to deal with your creditors for you Making one set monthly payment will help you to budget.

However, you need to be sure you understand the impact a DMP will have:

  • It may take longer to pay back your debt because you’ll be paying less each month 
  • Your creditors won’t necessarily freeze the interest and charges on your debts, so the amount you owe might go down by less than you think 
  • Your DMP provider might charge you a fee, although there are several free providers you can use so there’s no need to pay if you don’t want to
  • Your creditors might refuse to co-operate or continue to contact you
  • The DMP may show on your credit record, making it harder for you to get credit in the future

ADVANTAGES & DISADVANTAGES OF A DEBT MANAGEMENT PLAN

ADVANTAGES

Payments reduced – makes debts affordable, as based on your affordability & helps to reduce stress and helps to ensure mortgage, rent, council tax etc can be paid alongside unsecured lenders as these are accounted for in the income and expenditure.

Flexibility of expenditure – helps to ensure affordability

Payments are negotiated with Lenders on your behalf – legal obligation to accept payments. Payments are fair to lenders as they are calculated on a pro-rata basis (who owes the most get the largest %)

Perceivable that the client may be able to retain assets that would be at ‘risk’ in formal insolvency procedures.

DISADVANTAGES

No fixed period of repayment – the duration of the plan is dependent on how much debt you have and if the lenders will agree to freeze any interest or charges. It may be that the minimum payment is less than the interest created by the debt.

No guarantee that lenders will freeze interest and charges. Unless creditors freeze interest and charges the time taken and amount to repaid may be higher

No protection from lenders/legal action.

Unable to deal with HMRC debts – you would have to make arrangements directly with HMRC as HMRC debt cannot be included into a debt management plan

Will affect your credit rating

If you’re unsure about whether this sounds like it’s right for you, you might want to think about other options for dealing with your debts.