What is a debt management plan?

Finding yourself in financial difficulties can be a stressful experience, especially if you have several debts which are spiralling out of control. Fortunately, regaining control of your finances can be managed effectively with what is referred to as a debt management plan (DMP).

How does a Debt Management Plan work?

A Debt Management Plan is a financial agreement made between yourself and any creditors to help pay off your debts in a manageable and financially responsible way.

This arrangement is normally organised and managed by an external, third-party provider - although we cannot help you with this, there are others who will. During the application process, your income and priority living costs are taken into consideration before any repayment calculations are put together.

Your provider will help you put together a budget which works out just how much you can afford to pay to your creditors without making your financial situation worse. Your monthly payment will be made directly to this person and they will pass on the payment to your creditors.

What debts are included in a DMP?

A DMP covers unsecured debts such as credit card debt, store card debt, personal loans, and overdraft facilities. Debts including your household bills, your mortgage, or court-actioned debts will usually not be included in your DMP. As a result, you should continue paying these independently at the amount agreed between you and the provider.

How long does a DMP last?

A DMP can last different periods of time depending on exactly how much debt you have and how much you can afford to repay on a monthly basis. Naturally, the more debt you have, and the less you have available to pay, the longer your DMP will last for. Due to the flexibility of the DMP, if you find yourself with more disposable income you are more than welcome to change the amount you repay each month, reducing the time it takes to repay the debt.

Is a Debt Management Plan legally binding?

You can stop your DMP at any time and you will not have to make a commitment to the DMP when you commence it. It is not legally binding but you will probably have to sign an agreement form giving your DMP provider permission to contact your creditors on your behalf.

Can creditors refuse a Debt Management Plan?

Your creditors can refuse a Debt Management Plan if they so wish and, even if they accept it, there is absolutely no guarantee they will freeze interest and charges on your debt.

A DMP helps pay off your debts in a manageable and financially responsible way

Advantages of a DMP

The main advantage of a DMP is making one single, monthly payment to cover all your debts. This amount will be both realistic and affordable, meaning that you won’t find yourself getting back into unwanted financial difficulty.

You can also leave the DMP agreement whenever you want if you so wish - you will then have to continue repaying your outstanding debts by yourself, as single payments to each creditor. If your living costs or your income changes - as often happens - then it’s easy to adapt your repayment profile to accommodate your new circumstances. Your DMP is a flexible agreement which can be adapted to suit your present personal situation.

Disadvantages of a DMP

Debt Management Plans don’t come without their disadvantages and it’s important to consider both the positives and negatives before entering into one. For example, you may find that because you are making reduced payments on your debts, it will take much longer to repay them.

Furthermore, any interest that accrues on your debts could still be added - making the total amount you have to repay higher than it was when you started. Creditors are also not bound by the DMP which means they may pass your debt on to a collection agency or commence legal action.

Your ability to obtain credit will be affected in the short term and possibly the medium to long term. Repaying debt over a longer period may also increase the repayment time and amount.

Is an IVA better than a Debt Management Plan?

An IVA is a legally binding arrangement between you and your creditors, meaning that should you fail to make a payment or want to leave the agreement, you could find yourself in further financial difficulty.

However, an IVA may give you protection from any further action in a way that a Debt Management Plan does not. As long as you make payments consistently throughout the duration of your DMP, you may find that creditors are fair with regards to fees and any interest.

Is a Debt Management Plan right for me?

A Debt Management Plan is just one of many solutions available to deal with your finances. At MoneyFixers, we can review your circumstances and identify – at no obligation to you – whether this would be the best possible outcome. Get in touch today and we’ll be happy to assist.