Debt Management Plan - Pros and Cons

If you’re looking to restore control over your finances, a Debt Management Plan (DMP) could help you accomplish this. In essence, a DMP is an informal arrangement between you and your creditors. If agreed, these lenders will typically accept lower monthly repayments so you can resolve your debts.

Similar to other financial products though, DMPs have a range of pros and cons you should be aware of. So you can determine whether a Debt Management Plan is right for you, we’ve detailed these below:

Pros of a Debt Management Plan

Choosing a Debt Management Plan has several benefits compared to other financial solutions, these include:

More affordable monthly payments

Under a Debt Management Plan, you’ll make reduced payments towards your creditors each month. This will be more in line with what you can afford and should give you more money to spend on other day-to-day expenses.

Stop creditors harassing you for money

Assuming your creditors accept your Debt Management Plan, demands for repayment and other related correspondence should cease. Although you’ll probably still get the odd letter from them, not being constantly harassed for money can be great for your mental wellbeing.

Privacy

Unlike other solutions, your details will not be entered onto the insolvency register if you take out a DMP. This means your debt is largely kept private and you won’t face some of the repercussions which can occur with insolvency – for example, being barred from certain professions.

Cons of a Debt Management Plan

A DMP has several negatives though which you should be aware of:

Not legally binding

Although considered an advantage by some, a Debt Management Plan is not legally binding. This gives you some extra flexibility but a DMP does not carry any legal protections. As a result, if a creditor wants to no longer follow the terms of the agreement, there’s nothing to stop them.

Creditors don’t have to agree

A Debt Management Plan is very much dependent on your creditors agreeing to it. Although you can make a proposal, these lenders might choose to reject it. If one of your creditors refuses the terms of the agreement, the DMP may no longer be beneficial.

Interest may not be frozen

Whereas some debt solutions - such as an IVA - will freeze interest and charges, this isn’t guaranteed with a DMP. Although many creditors will do this as a gesture of goodwill, other lenders won’t be as generous.

May take longer to resolve debts

Depending on the size of your debt, a DMP could be resolved reasonably quickly. However, as there is no fixed length for this solution, they will last until the debt is paid off. In contrast, a Trust Deed in Scotland can last for around five years while an IVA should end in about six.

Your credit rating will be affected

Your credit rating will be affected while a Debt Management Plan is active. As a result, you could find it harder to obtain loans or other financial products in the future.

Have questions about Debt Management Plans?

If you’d like to find more information about Debt Management Plans, click the button below and we can determine if one of these would be the best solution for you. In just a few hours, you could be well on your way to resolving your debts.

Further Reading