A Debt Management Plan (DMP) is an agreement between a borrower and their lenders. They are designed to help people who can afford to make some debt repayments each month but cannot afford to make the repayments at their current level.
You can only deal with unsecured debts via a Debt Management Plan. They cannot be used to help you deal with a debt that is secured against your property, such as a mortgage. However, they are usually structured in such a way that your mortgage payments are prioritised over your unsecured debt to ensure that you don’t fall behind on your mortgage payments and potentially lose your home.
How Does a Debt Management Plan Work?
Under a Debt Management Plan your lenders agree to a restructuring of your debts to make the monthly repayments affordable. They can do this in a number of ways.
First, they can extend the period in which you will repay your debts. This means that you will be paying a lower amount each month although it also means that you will be paying that lower amount for longer.
Second, they can reduce or freeze the interest rate. Note that if your lenders agree to lowering your monthly debt repayments by extending the repayment period but keep the interest rates the same it could mean that you ultimately end up paying more via a Debt Management Plan.
Bear in mind that a Debt Management Plan is an informal arrangement. This means that even if your lenders agree to a Debt Management Plan there is nothing to stop them changing their minds at a later date and reverting to the previous repayment levels. In practice they won’t do this unless you fail to keep up the repayments or your situation changes in a meaningful way, though.
Having said that, as a Debt Management Plan is an informal arrangement there is nothing to stop you changing its terms or cancelling it completely if your situation changes either. As an example, if you received an unexpected windfall you might decide to stop the monthly repayments and pay off your outstanding balance in one go.
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How Do You Set Up a Debt Management Plan?
You can set up a Debt Management Plan on your own, but many people use a debt management company.
Either you or the debt management company will calculate your income and expenditure to work out what you can afford to pay towards your debts each month. Then a proposal is put to your lenders asking them if they will accept your Debt Management Plan.
Your lenders are not required to accept your proposal. Even if they agree to some form of Debt Management Plan they may want to make changes to your initial proposal.
Once the Debt Management Plan has been set up each of the lenders gets paid a smaller amount each month. If you have used a debt management company to help you then usually you will pay that company one single payment each month and they will allocate the money to each lender.
Debt Management Plans can usually be set up in a matter of days. Depending on your circumstances and the debt management company that you use, it can even be possible to have a Debt Management Plan set up on the same day.
Getting Your Lenders To Agree
Your lenders are unlikely to agree to a debt management plan if you simply ask them to freeze the interest on your debts and accept that you’ll only be paying half as much each month as you were previously. They are going to want to see that you have given some thought in terms of how you will repay your debts and you will need to convince them that your debt management plan has reasonable prospect of success.
This might mean that you need to make some difficult choices. A lender is more likely to accept your debt management plan if part of that plan is selling your car because it costs too much to run, for instance. That shows that you are prepared to meet them half way. Similarly, if you have taken on a second job to increase your income that would also show that you are making a reasonable attempt to address your financial situation.
Get Confirmation of Any Agreement
Although a debt management plan is an information arrangement, it is important that you get any agreement from your lenders in writing to avoid potential misunderstandings in the future.
If you have sold your car it might be that you have offered a one-off payment to your lenders from the money you received from the sale as part of the debt management plan. You don’t want to find out at a later date that they are claiming that they didn’t realise that your one-off payment formed part of the plan.
If you agree a debt management plan with your lenders, generally they will adhere to that plan even though it is only an informal agreement and they are not legally obliged to do so. If they decide to take you to court, though, provided you can demonstrate in writing that you had an informal agreement and can show that you have stuck to the agreement the court will look favourably upon you. The court won’t waive your debt at that point, but it will be an influencing factor when they set the level at which you need to repay the debt each month.
How Much Does a Debt Management Plan Cost?
Some debt management companies will charge for their services. There may be a fee to set up the Debt Management Plan, a fee to handle the monthly payments or both. It is important that you check whether any fees will be charged so you understand what your Debt Management Plan will cost.
But it is also worth remembering that some debt management companies are better than others. It might be worth paying slightly more if that means you get a debt management company that has a better track record when it comes to getting interest rates frozen, for instance. Other debt management companies have a better track record when it comes to getting lenders to agree to lower repayments.
As well as checking what fees you may be charged, you should also ensure that the debt management company you use is authorised by the Financial Conduct Authority.
How Does a Debt Management Plan Affect Your Credit Score?
If you’ve found yourself in a position where you need to consider a Debt Management Plan to resolve your financial difficulties, it’s likely that your credit score is already fairly low. And in the short term that won’t improve because you’ll be paying less than you are supposed to be paying towards your debts.
But the good news is that over time a Debt Management Plan should make your credit score better. This is because provided you keep up the repayments, your Debt Management Plan should improve your financial position.
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