Unlike most debt solutions available in the UK, debt management plans are informal agreements with very loose eligibility criteria.
That being said, there are certainly some requirements which you’re going to need to fulfil and it’s important that you’re aware of them.
In this post, I’ll be looking at what you need to have in order to qualify for a debt management plan (DMP).
How do Debt Management Plans Work?
A debt management plan is an informal agreement between you and your creditors which states that you’re going to be paying off your debt(s) to them at a reduced rate that is affordable to you.
It’s quite similar to an Individual Voluntary Arrangement (IVA) but unlike an IVA, it’s not formal or legally binding.
Furthermore, in a debt management plan, your creditors might agree to freeze interest and charges on your debt(s) but they are not obligated to do so. If the interest and charges continue on your debts, then you may be paying back a much larger amount than what you initially took.
Usually, there is a third-party that negotiates the terms of your debt management plan (DMP). This could either be a licensed practitioner who’s acting as a DMP provider or it could be a debt management company that offers DMPs.
It’s the responsibility of the DMP provider to manage your DMP from start to finish. They will help you draft your initial payment offer and they’re also responsible for what your monthly payments look like. Furthermore, they are also responsible for negotiating with your creditors on your behalf.
Please note that unlike an IVA, a debt management plan does not protect you from legal action by your creditors. While it’s unlikely that any creditor will pursue court action against you while a DMP is in place, it’s still a possibility.
What do I Need in order to be Eligible for a Debt Management Plan?
There are no such eligibility criteria for a DMP since a DMP is an informal agreement between you and your creditors.
That being said, it’s important for you to be aware of the fact that it’s up to your creditors whether or not your DMP is going to be approved or not.
Keeping this in mind, there are some factors which you’re going to need to think about.
For example, why would any creditor agree to a reduced payment plan if they’re going to get their money much quicker by pursuing court action against you?
Remember that creditors will be favourable towards your DMP only if they feel it’s a better option for them.
You’re going to have to prove to them that the reduced payments that are going to be part of your DMP are the extent of what you can afford.
|Thus, you do require a steady, stable source of income in order for there to be a chance of your DMP getting approved.|
Secondly, an important thing to keep in mind is that a DMP is an informal debt solution. Since it’s an informal debt solution, it can only cover unsecured debts.
Secured and/or priority debts cannot be included within a DMP. Some examples of priority debt(s) include:
- Court fines
- Criminal fines
- Council Tax debt
- Utility bills (e.g., gas and electric)
- Child support
- Income Tax, National Insurance and VAT arrears
- Mortgage payments, rent arrears and/or any loans that have been secured against your home
- Hire purchase agreements
If you have such debts, you will not be able to include them within your DMP. You will need to keep making your monthly payment towards them separate from your DMP.
|Thus, in order to qualify for a debt management plan, you need to have unsecured debt (or debts).|
Examples of unsecured debt include:
- Credit card debt
- Catalogue debt
- Store cards
- Personal loans
- Any other loan that has not been “secured” against any valuable asset of yours.
If you have a combination of both unsecured as well as secured debts, then you have some calculations to do.
Since your secured debts cannot be included within your DMP, you will have to keep paying those creditors separately. These monthly payments will be considered as essential living costs when drafting the payment offer for your DMP.
Thus, you’re going to have to calculate the amount of spare income you have left to pay towards your DMP after you’ve made your monthly payment(s) towards your secured debts.
If the spare income that you’re left with for payments towards your DMP is too little, then your creditors are not going to accept it.
As a result, your DMP will not be passed.
You can ask your DMP firm for debt advice when you’re first creating a payment offer for your DMP. They will help you calculate your spare income after accounting for payments you need to make towards your secured debts.
In conclusion, while a DMP one of the most informal and flexible debt solutions of all, it still has a few requirements you need to keep in mind:
- You must have unsecured debts.
- You must have a steady and stable source of income.
- Your monthly spare income needs to be sizeable enough to be acceptable to your creditors.
Your spare income is, of course, found by subtracting your essential expenditure from your monthly income.
If you feel you’re going to have trouble getting your creditors to agree but can only afford to pay an extremely reduced amount, you can try looking towards some other debt solution.
Make sure to seek debt advice and explore all other options that may be available to you.
You can also try asking your creditors for any changes in the terms of the DMP that they want which could get them to agree to it.
A DMP is extremely flexible and can facilitate individuals suffering from many different types of debt problems.
That being said, it still has a few requirements that you definitely need to know about.
I hope you found this post useful. Let me know if you have any further queries.