Debt Management Plan

A Debt Management Plan (DMP) is an agreement between you and your creditors, for you to fully pay off your debts through one affordable monthly payment. The total amount of this payment is calculated by taking into consideration all of your monthly incomings and outgoings. After this, a reasonable amount is decided which enables you to pay towards your creditors at a reduced rate.

Only ‘non priority debts’ can be included in a DMP which include credit card debts, personal loans and overdrafts.

What you pay is based on your personal circumstances, so you would only pay what you can afford – if things change, then the amount you pay each month may also be altered to cater to this.

It’s an informal agreement which means the contract can be stopped at any time by either you or your creditors. A DMP can often be negotiated by a third party company on your behalf – these companies may charge a fee, but this also means that your creditors are less likely to continue contacting you directly.

There are many factors to consider before opting for a Debt Management Plan. Some advantages / disadvantages include:

Advantages

• You only pay what you can afford and this amount can change if your circumstances do.
• A Debt Management firm will actively deal with the creditors on your behalf.
• You can cancel the plan at any time you wish.
• All your eligible debts can be consolidated into one monthly payment.
• It’s possible that some creditors may freeze interest, as well as reduce repayment amounts.

Disadvantages

• Your creditors can cancel at any time and there is no obligation for them to agree to the plan.
• A Debt Management Plan may have a negative impact on your credit file – this may make it difficult for you to apply for credit whilst on the plan, as well as for a period of time after.
• There may be additional costs entering into a Debt Management Plan.

What you pay towards a Debt Management Plan depends entirely on your debt amount and the DMP provider handling your plan. You will typically be paying an amount to cover your eligible debts, as well as any fees charged by the DMP company.

All of these amounts should be outlined by any company handling your case before you agree to start anything, so it’s worth reading over your plan thoroughly to make sure you know exactly where your money is going.
Here’s a brief breakdown of what your payments will cover:

Debt Repayments
The non-priority debts that are included in your DMP will be subject to your creditors approval, but you can start making your proposed reduced payments straight away until they have reviewed this.

Interest and Charges
Your creditors are not obliged to freeze interest and charges for your DMP, so your overall debt level may continue to increase – your monthly payments will go towards these.

Other Fees
The fees charged by your Debt Management company cover their administration costs. These fees are capped at 50% of your total payment and may mean that your plan lasts longer than necessary due to the smaller amount actually going towards your creditors.

DMP Vs Individual Voluntary Arrangement (IVA)

Both of these plans allow you to consolidate your debts into one monthly payment, but there are some key differences to consider between these solutions:

• Interest and charges – your creditors are not obliged to freeze interest and charges with a DMP, meaning that the total amount you are paying off continues to increase. With an IVA interest and charges are frozen.
• An IVA is a formal arrangement between you and your creditors, so it is formally binding once agreed to. A DMP is informal and can be cancelled at any time by you or your creditors.

Here’s some further information to consider if you are looking at an IVA or Debt Management Plan.

Debt Management Plan Vs. Bankruptcy

There are major differences between the nature of these two options:

• A DMP is an informal agreement and your creditors are not obliged to agree to it. Bankruptcy is an official court order in which all your creditors look at your assets and liabilities to determine if you’re eligible.
• You can only include unsecured debts in a DMP, whereas most debts will typically be included in bankruptcy.
• Bankruptcy lasts 12 months, whereas a DMP lasts for however long is needed for the outstanding debts to be paid off.

Here’s some further information to consider if you are looking at a Debt Management Plan or Bankruptcy.

When choosing a debt solution, it’s crucial that you do make an informed decision – every person’s situation is different, and you’ll need to choose the path that feels right for you personally.

There may not be a specified end date for your DMP, due to the addition of interest from creditors and potential added fees from the provider, but this may still be an option if you are confident that you can afford to keep up monthly payments towards your debts.

It may also be an option if you prefer an informal arrangement which you may cancel at any time you like – however, you must also be prepared in case any creditors withdraw from the plan too.

We’d recommend seeking help from an FCA regulated practice or charitable organisation.