A debt management plan is one of the most affordable and flexible debt solutions that are available to debtors in the UK.
However, it can be difficult to set up sometimes and there are certainly some aspects of it that many debtors get confused about.
In this post, I’ll be going over how debt management plans work and what steps you should take to ensure that your DMP is a success.
What is a Debt Management Plan (DMP)?
A debt management plan is an informal solution which allows you to pay off your debts to your creditors at a rate which is affordable to you.
You pay in the form of monthly payments. These monthly payments continue until your debt has been paid off in full.
This is why depending on the amount of debt you have and what your monthly payments are like, the duration of DMPs can vary by a lot.
I’ve heard of DMPs that have gone on for over ten years.
A debt management plan can be suitable for you if you have a lot of non-priority/unsecured debts such as credit cards, store card debt, overdrafts and/or personal loans, etc.
Once your debt management plan is put in place, contact between you and your creditors becomes minimal. Although they can still legally contact you, this usually does not happen as long as you’re making your monthly payment on time.
You can set up a debt management plan on your own or you can hire a DMP provider to set it up for you.
Of course, if you set up the debt management plan on your own, then contact with creditors is not going to stop since you’re the one who’s going to be dealing with them.
However, if you choose to set it up with an organisation, then they’re the ones who will negotiate and talk with your creditors.
As part of a debt management plan with a DMP provider, you will make one monthly payment to them and they’re the ones who will distribute this payment among your creditors.
Of course, the payment is distributed among your creditors according to what the amount of money you owe to each creditor.
For example, if you owe creditor 1 50% of your total debt and creditor 2 30% of your total debt, then creditor 1 is going to get 50% of your monthly payment whereas creditor 2 is going to get 30% of it.
Does Interest get Frozen when a DMP is in Place?
The great thing about formal debt solutions such as an Individual Voluntary Arrangement (IVA) is the fact that creditors are obligated to freeze interest and charges.
When it comes to a DMP, creditors are not obligated to do any such thing. There definitely is a chance that some (or all) of your creditors may freeze interest and charges but there’s no obligation for them to do so.
If your creditors do stop charging interest on your payments, then this can immensely reduce the amount you pay back overall.
What are Some Debts I can Pay Off Using a DMP?
DMPs address most forms of unsecured debts. Some examples of debts that are covered by DMPs include:
- Overdrafts on current accounts
- Personal loans
- Cash borrowed from close friends or family
- Bank loans or building society loans
- Outstanding credit card balance
- Catalogue debts
What are Some Debts I can’t Pay Off Using a DMP?
You cannot use a DMP to pay off priority debts. These types of debts include:
- Magistrates court fines
- TV Licence fees
- Council Tax bills
- Utility bills such as gas, electricity, water, etc.
- Child maintenance fees
- Income Tax and VAT
- Mortgage payments, rent arrears and/or any other payments that are secured against your home
- Hire purchase agreements (assuming that the item that you’re buying with the agreement is essential)
Debt Advice and Organisations
As mentioned earlier, you can choose to set up a DMP on your own or you can hire an agency to do it for you.
Personally, I would recommend that you enlist the services of a debt management agency to help you with it.
This is because one of the main appeals of DMPs is the fact that you won’t have to deal with your creditors anymore.
Setting up and managing a DMP on your own can be an extremely overwhelming and difficult experience, especially if you’re not well-versed in how the process works.
That being said, you have to be careful when you’re looking at DMP providers.
Always choose a provider that does not charge you money to set up and manage your DMP. Of course, when you’re in debt, it would make absolutely no sense to go to an organisation that charges people money to set up debt solutions.
Thus, it’s a good idea to go to an independent charity to get your debt management plan set up. Some great charities that can help you set up and manage your DMP for free are Stepchange, Payplan and National Debtline.
DMPs and Your Credit Score
Of course, just like all such solutions, entering into a DMP is going to have a negative effect on your credit score. This is because the payments you make to your creditors as part of your DMP are reduced payments tailored according to what you can afford to pay.
Since they are reduced payments, they cause your credit score to fall.
While your credit score does fall due to these reduced monthly payments, it’s important to note that they are flagged as being part of a DMP.
Thus, any potential creditors looking through your credit file will know that the repayments are reduced because they are part of a DMP.
A DMP can definitely be a great option for paying off debts to creditors. That being said, it’s important to seek debt advice beforehand to ensure that it is indeed the best way to go for your particular financial situation.
Work out how much you can afford to pay and keep making repayments until the entirety of your debt is written off.