One of the toughest aspects of a debt management plan is calculating the payment offer that is presented to the creditors.
The payment offer needs to have a delicate balance of what is affordable to you but also acceptable for your creditors.
In this post, I’ll be looking at how you can effectively develop the payment offer for your debt management plan as well as covering any debt management plan fees you might want to watch out for.
Before any Calculation, You Should Know That…
Debt management plans are informal debt solutions. This means that they are not legally binding.
Furthermore, a debt management plan does not cover priority/secured debts such as mortgage payments, rent arrears, council tax bills, criminal fines, etc.
If you only have these types of debts, you shouldn’t be considering a debt management plan.
If you have a combination of secured and unsecured debts, then you should know that the secured debts you have cannot be included within your debt management plan.
As a result, you’re going to have to make payments to those priority debts separately from your debt management plan.
Thus, when you’re making a payment offer for your debt management plan and determining how much you can afford to pay towards it each month, you need to take the payments towards your priority debts into account.
Of course, the payments you’re going to make towards your priority debts are going to reduce the amount of money you can contribute towards your debt management plan.
You also cannot give your debt management plan higher preference as priority debts have to be dealt with first. This is because they have much more dire consequences if ignored.
When you’re making a payment offer for your DMP, your payments towards priority debt(s) will be a part of your ‘essential living costs’.
Calculating Monthly Payments
Now that we know what types of debt can be included within a DMP, let’s try figuring out how you can calculate the amount of money you can afford to contribute towards it each month.
Firstly, you have to determine what your monthly income is. Of course, this is much easier if you have a regular, steady income.
On the other hand, if you have an income that varies every month, you might have a little trouble determining how much you earn.
A good way to get an approximate value of how much you earn each month, you should take the average of your monthly income for the past 6 – 12 months. You can use that as the monthly income that you earn.
Once you’ve figured out your monthly income, it’s time to figure out what your monthly expenditures look like.
Looking up bank statements for the previous months can help a lot in figuring out how much you spend on essentials every month.
It’s important to note that your payments towards any priority debt(s) that you have need to be included within this category as well. This is because these types of debt can’t be part of DMPs.
Now that you have your monthly income and your monthly expenditure, you can subtract the latter from the former to get your monthly surplus (or disposable) income.
This disposable income is the approximate amount of what you can hope to pay towards your debt repayments each month.
Determining DMP Duration
A debt management plan can be a great way of consolidating debts but it’s definitely a debt solution that can go on for a much longer time than other debt solutions.
Many debtors are apprehensive about opting for a debt management plan as they are afraid that it’s going to last an extremely long time.
For comparison: an IVA typically lasts five years whereas the duration of a DMP can exceed ten years.
Once you’ve figured out what your monthly debt payments are going to be. You can use that value to determine approximately how long your DMP is going to last.
Simply divide your total debt by the amount you’ll be paying every month towards your DMP. This should give you an approximation of the amount of months it’s going to take for your DMP to finish.
You may be able to get your DMP provider to make changes to your payments over the years according to your changing financial situation. Due to this, the value determined here is simply an approximation; Not an exact value.
For more debt advice on this, you should contact your debt management plan provider.
You can visit other agencies as well, just make sure they’re authorised and regulated by the Financial Conduct Authority (FCA).
Calculators Available Online
There are a number of DMP calculators available online that could help you determine a number of different factors, including what your debt payments will be as well as how long your DMP is going to last.
A calculator can also help you understand how much money you’ll be saving if your creditors agree to freeze interest and charges on your debt(s). This is something that creditors may or may not do as part of the DMP.
Another thing that sometimes happens in DMPs that doesn’t get discussed a lot is that maybe one or two creditors may not agree to your DMP whereas others would.
In this case, you would have to deal with those creditors separately from your DMP. As you can probably tell, the math with this can get overwhelming. There are calculators available online for this as well.
Again, I have to point out that any calculator you use will only give you rough estimates because there are several other aspects that could affect the duration of your DMP.
Using a DMP calculator can really help you determine whether debt management plans are something you should seriously consider or not.