Are you struggling with your debt payments and don’t see a way out?
I’ve brought you a complete guide that provides debt help and advice, and mentions everything you need to know about what a debt management plan is, how it affects your credit report, what interest rates you can expect, and more.
Let’s get right into it.
What is a Debt Management Plan? – Repaying Your Debts
A debt management plan, or DMP for short, is a monthly payment plan that allows you to manage your debts effectively.
It also provides a lot of help in terms of your payment options and the conditions of your debts.
It allows you to set up a monthly payment plan with your creditors where you pay back a percentage of your total debt each month as an instalment.
If you cannot afford to pay your creditors a lump sum amount as your debt payment, it may help you if you are able to set up a DMP that allows you to keep making payments to your creditor at your current interest rate.
A debt management plan can be very useful and help you a lot depending on when you get it and the specific conditions associated with the plan.
If you need help with your debts and don’t want to avail of a regular insolvency procedure, a DMP may just be right for you in helping you deal with your debt.
How Do I Get a Debt Management Plan?
This section addresses the specifics of getting a debt management plan.
I have outlined the procedure that you need to follow to avail of a DMP and convince your creditors to grant you one.
Hopefully, this section will help make the logistical details of DMPs much easier for you.
You can either contact your creditors directly or do it through a debt management company.
If you want to go the company route, here’s what you need to do:
- You need to set up a specific plan with a debt management company. The plan is only valid if the company is authorised and regulated by the Financial Conduct Authority (FCA). If you need help with this, you can take a look at the Financial Services Register.
- You may be asked to provide details about the assets you own, the value of those assets, your current income, your debts, your credit score, and the creditors you owe debt to. Then, the company will calculate the monthly payments you will be required to pay.
- Lastly, your creditors are contacted by the company, which requests them to accept the DMP.
The creditors have full agency to decline and not accept the DMP. Some creditors only agree to the DMP after they are able to have some changes incorporated to the terms of the DMP.
As you can probably realise, getting a DMP approved is not always a straightforward process.
First, let’s address the costs associated with DMPs in the UK. Regardless of whether you have outstanding debts on your credit cards, a personal debt, or a student loan, DMPs work just about the same in each instance.
Depending on what company you go to and where you live, you may be charged a fee by the company you choose to consult.
These fees do vary, but the two most common types of fees you’ll feel will usually be a handling fee and a set-up fee.
You may be charged a handling fee by the company that made the DMP every time you make a payment on your debts.
Other than that, you may be charged a set-up fee at the time of the initiation of your DMP. You need to be aware of the fees and charges you may incur, and I’m here to help guide you through the process.
You also need to know if you are eligible to get a DMP in the first place.
If you try to dive right into the process without properly learning if you are eligible for a DMP, it could cost you in terms of both your money and time.
As a general rule, DMPs only apply on unsecured debts. Unsecured debts are debts that do not have any collateral associated with them. This means that you don’t put up an asset of yours as collateral for a situation where you won’t be able to pay back the debt.
If your debts mostly consist of secured loans, you probably won’t be able to get a DMP on your debts. For example, if a property of yours is secured against your loans, you won’t be eligible to get a DMP on your loans.
You need to act responsibly once your DMP is approved.
You do have certain responsibilities and duties you need to fulfill if you don’t want your DMP to be cancelled.
For one, you need to keep making regular payments on your DMP. If you keep missing payments, it could take a hit on your credit file, just as overusing your credit cards would.
Other than that, you need to fulfil any explicit terms and conditions listed in your DMP. If you don’t you could run the risk of your DMP being revoked. You could also be hounded by your creditors and debt collectors.
The Benefits and Risks of Getting Debt Management Plans
This section will address the potential pros and cons of getting a DMP.
Let’s get right into it.
|1. DMPs offer a convenient solution if you can’t afford to pay off your debt all at once.||1. A DMP doesn’t legally stop your creditors or debt collectors from contacting you like a debt relief order would.|
|2. If you don’t want to get a legally binding procedure associated with your debt, a DMP may be a good option for you.||2. Your lenders could choose to press charges against you and pursue further action.|
|3. A DMP gives you more time to figure out how to pay your debts and gather more income sources.||3. You could lose a lot of money if you pay your company a substantial set-up fee for your DMP and your lender outrightly refuses to accept the DMP.|
|4. If you keep making regular payments on your DMP, it could potentially improve your credit file.||4. If you keep missing payments on your DMP, it could have a very negative impact on your credit file.|
|5. Your creditors can still choose to keep adding new charges to your arrangement or increase the amount of interest on the debt.|
Frequently Asked Questions – FAQs
Does a DMP affect my credit score?
Yes, just as debts on your credit cards and mortgages can impact your credit file, a DMP can affect your credit file too.
If you keep missing monthly payments on your credit file, it could end up having a severe impact on your credit file, perhaps even to the point where lenders will be unwilling to lend you money in the future.
The good news is that it works the other way around too. If you stay consistent with your payments, it may eventually have a positive impact on your credit file. Therefore, the impact of a DMP on your credit file relates directly to how consistent you are with your payments.
How do I know if a DMP is right for me?
If you have an unsecured loan that you know you won’t be able to pay off as a lump sum, a DMP could possibly be right for you.
If your financial circumstances are such that you find it much easier to manage your debt once you’re paying it back in monthly instalments, a DMP is definitely the right choice for you.
Finally, if you want an informal arrangement that isn’t legally binding and doesn’t involve the government as meticulously as insolvency solutions would, a DMP is the route you should go.
What kind of debts does a DMP cater to?
A DMP caters to most types of unsecured debts, such as personal loans, credit card debt and other unsecured loans.
It does not cater to secured debt, debt that is secured against, for instance, your property.
Can I pay my DMP off early?
Yes, it is possible to pay your DMP off early.
If you’ve come across a large sum of money, such as inheritance money, money from a property, or a large bonus at work, you may be looking to use it to pay your DMP off early and free yourself from the hassle and worry of making payments every month.
If that is indeed the case, you’ll be pleased to learn that it is definitely possible. I do recommend that you consult a good debt advice agency when you’re about to make that choice, since they can help you better understand the situation you’re in and what you need to do.
Is a DMP legally binding?
A DMP is not a legally binding procedure. Some insolvency solutions, such as bankruptcy, IVAs, and DROs are legally binding and involve a fair bit of court action.
A DMP is a different breed, though. You are not legally required to stay committed to the DMP throughout its active period. However, even though a DMP is an informal procedure, there are a few formalities involved, such as a DMP agreement form.
You may be asked to sign a DMP agreement form that gives your company the right to contact your lenders on your behalf.
Are DMPs a good idea?
It depends on your circumstances, the amount of debt you owe, and the type of debt you owe.
DMPs are a great idea if they make it easier to pay your debts back than before. If instalments work for you, then a DMP is a great choice.
If your debt is so massive that you’re hopelessly unable to pay it back immediately, you should opt for a DMP to make the situation easier for you.
On the other hand, if adhering to a monthly payment schedule is not your piece of cake, don’t go for a DMP and look for alternate solutions to your problem instead.
Wrapping it Up
DMPs are a great way to make your loans more manageable and relieve some of the stress that comes with lump sum payments and annoying creditors.
This guide aimed to make the process of deciding whether you need a DMP as easy for you as possible.
If you need any more debt advice, feel free to reach out.