Debt Management Plans: What are they & are they for you?

By Hayley Hemmings
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A Debt Management Plan is one option that could help you get back on track if you’re really struggling with debt.

But on the other hand, you may want to avoid one like you would a super-fast, oversized wasp.

 

A Debt Management Plan (DMP) is an “informal” debt solution for people in the UK who are struggling to make the minimum repayments on their unsecured debts such as credit cards or personal loans.

A DMP works by allowing you to pay back a lower monthly payment to your creditors, so that you can also afford to survive day-to-day.

A DMP is classed as an informal debt solution because it’s not legally binding - it doesn’t involve legal proceedings, like an Individual Voluntary Arrangement (IVA) or bankruptcy does. There are both pros and cons to be aware of before going down the DMP route. Here they are outlined below:

Advantages of a DMP

Lower Monthly Payment to Your Creditors

A lower monthly payment makes the debt easier to cope with – typically you’d make one monthly payment to a debt management provider, who would then share your payment out amongst your creditors.

 

The Interest on Your Debt May be Frozen at 0%

This isn’t guaranteed to happen as a creditor will freeze interest at their discretion. But if they do, it means that even though your monthly payment will be lower, you’ll still be paying off your debt (and not mostly interest).

 

You Can Give Your Creditors the Slip

In a fashion that is. Once you fall behind with your debts, you’ll have to contend with chasing letters and phone calls, which are at best no fun whatsoever and at worst, quite scary.

When you have a DMP up and running, your creditors won’t be able to chase you for payment (as you’ll have agreed a new lower payment). Struggling with debt to the point where you can’t make repayments can be extremely stressful – and not having to deal with creditors anymore takes much of the stress out of the situation.

 

You Won’t Lose Your Assets

You won’t have to give up assets like your car (or home if you have one already) to pay your creditors, as a DMP is for unsecured debts.

 

You Won’t Have to Tell Anyone

You won’t even have to tell your friends or family if you don’t want to. Some professions such as the police force, or financial institutions, insist that you tell them if you go through insolvency proceedings. As a DMP isn’t a form of insolvency, you won’t have to worry about your job being affected.

Pitfalls of a DMP

Your Credit Rating Will Take a Serious Whacking

Even though you’ll still be making a monthly payment to your creditors, your debts will be marked on your file as defaults. This is because you will be breaching your credit agreement and not paying the amount originally agreed.

Defaults stay on your credit file for 6 years. If you’re looking to buy a home in the future, you’ll need to give a lot of thought as to whether you should go down this route, as you may not be able to get a mortgage for some time.

 

Further Credit will be a No-No

Your current lines of credit will be closed and you won’t be allowed any more until your current debts are settled. In all likelihood, you may not be able to get credit (at a reasonable rate of interest) for a few years after your DMP, as the defaults on your credit file will make it tricky for you.

 

Arthritis May Set In Before Your Debt is Cleared

It could take ages to pay back your debt once you’re in a DMP. This is because you’ll be making a lower monthly payment for the foreseeable future.

You may be able to ask for some of your debt to be written off in the event that you come into a lump sum. However, any lump sum would need to be shared between all of your creditors.

 

Your Emotions Will Think They’re on The Big Dipper

Once you’re in a DMP, it’s often a long road ahead of paying back those lower monthly payments until you find yourself back on track or you can clear your debts completely.

Even if you find yourself coming into a little more money in the future, you won’t be able to spend it freely once you’re in a DMP – disposable income must be used to pay your creditors first. You’ll need to take part in an annual review with your debt management provider to discuss your income and outgoings. All in all, this can be hard to deal with emotionally.

How to Arrange a DMP

You can either approach your creditors directly to ask them to help you set up a DMP, or you can ask a debt management provider to do this on your behalf. The latter option is usually preferred by most, because it’s less stressful.

If you decide to use a debt management provider, be aware that there are many that will charge a fee for setting up a DMP and managing it for you. The fee would be taken out of your monthly payment to your creditors.

However, to avoid any fees, you can contact StepChange or National Debtline. Both of these are charities that will give you advice on your debt situation and set up a DMP for you if required – all for free.

Is a DMP Right for You?

A DMP could be a helpful option for you if you’re severely distressed about your unsecured (non-priority) debts and you can’t currently make the repayments. The following types of debts can be included in a DMP:

- Credit cards / store cards

- Personal loans

- Payday loans

- Catalogue debts

- Debts to family or friends

- Overdrafts

 

You can’t use a DMP to pay off secured (priority) debts, including:

- Mortgage or rent arrears

- Secured loans (that are secured against your home)

- Council Tax

- Utility bill debts

- Tax (Income Tax, VAT or National Insurance Contributions)

- Child maintenance arrears

- TV licence

- Court fines

 

Irrespective of what sort of debts you’re struggling with, it’s important to note that it’s not the only option out there.

Alternative options

If you’re finding that you’re missing debt repayments here and there because of overspending in other areas, then a DMP probably won’t be the answer.

You may be able to manage your debt more effectively through careful budgeting and by taking advantage of better interest rates through credit card balance transfers and debt consolidation. Thinking of consolidating your debts? Have a look at how you can consolidate your debt into one manageable lump.

 

Top Takeaway

Always seek debt advice from a qualified debt professional before going ahead with any debt solution.

With that said, if you can avoid a DMP, you should. It’s definitely worth trying to get your debt under control first, if you can, because of the lasting impact a debt solution like a DMP can have on your credit rating.

You should always talk to your creditors to explain your current situation first and ask for their help. Even though they may seem like they have the compassion of an overworked prison officer, they are only human after all!

 

Have you had any experience with DMPs before?

 

Author Bio: Hayley Hemmings is a freelance writer, blogger and tea addict from Yorkshire. She’s passionate about money matters, frugal living and loves anything handmade. When Hayley’s not writing, she’s most likely to be found enjoying snuggles with her little girl or walking her border collie through the beautiful Yorkshire countryside.  

 

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