Manage Debt Affordably
Debt Management Plan
A debt management plan is the most commonly used debt management solution in the UK.
Using this option will help you get back in control of your finances by reducing your payments to an amount you can afford.
There are however, significant drawbacks to the solution including the length of time it can take to become debt free.
Use this guide to find out the answers to many of the most common debt management plan questions. Need specific advice? Get in touch today to speak to one of our experts.
What Is A Debt
Management Plan?
What is a debt management plan?
A Debt Management Plan (DMP) allows you to reduce the amount you pay towards your unsecured debts each month to an affordable amount.
Almost anyone is eligible to use this type of debt solution. It is an informal agreement.
In most cases, you only have one single payment every month which is then divided between your creditors. This means budgeting your debt payments is much easier.
Debt management plan key facts:
- A debt management plan is quick to implement. This means you can get back in control of your finances fast.
- The agreement is informal so you can negotiate it with your creditors yourself if you want. You can also get help from a free service provider such as Step Change.
- Your DMP can last a long time. There is no agreement to write debt off. You must continue making your payments until your debt is paid in full or you are in a position to settle early.
- A DMP is flexible. You can increase your payments to pay your debt more quickly at any time. If you come into extra money, you can choose to pay off more of your debt or spend it on other things.
- Your possessions are not normally affected. You will be able to keep your car regardless of its value.
How Will A Debt
Management Plan Affect You?
How a debt management plan will affect you will depend on your circumstances.
If you are trying to decide whether or not to use this debt management option, here are some of the things you should think about.
How much will your monthly payment be?
A debt management plan will reduce your debt payments to an amount you can afford.
Your monthly payment is based on your surplus (also known as disposable) income. This is the amount you have left over from your monthly income after all your reasonable living expenses have been taken into account.
For example:
If your total monthly income is £2500 and your total monthly living expenses add up to £2300. The amount left over is £200.
Your debt management plan would therefore reduce your monthly payments down to £200.
Minimum payment for a DMP
Generally speaking the minimum monthly payment amount for a debt management plan is £100. This is to cover all of your debts (it is not per debt).
Note: Need help with calculating your monthly surplus income? Get in touch today and speak to one of our experts.
How long does a debt management plan last?
Using a DMP will significantly increase the time it takes you to repay your debt.
The reason for this is because the monthly debt payments you make are reduced. However, you still have to pay off all the debt you owe.
You can find out how long your plan is likely to last in the following way: Divide your total debt by the monthly payment you will make.
For example:
If you owe £30,000 and can afford to pay £200/mth, it will take you over 12 years to repay
(£30,000 / £200 = 150 months / 12 = 12.5 years)
An average debt management plan can take between 5-10 years to complete.
You can reduce the length of your DMP in two ways:
1 - Increasing the amount you pay into it each month.
2 – Make a cash sum offer to settle one or more of the accounts in your plan.
Note: A debt management plan might work well for you if you only need a temporary solution. For example, perhaps you know you will be able to increase your payments again in the short term.
A debt management plan is one of the most private debt solutions.
It is an informal agreement with your creditors. This means there is no official record of you the plan. As a result, no one will find out unless you tell them.
It is important to note that starting a DMP will negatively affect your credit file. Your creditors are likely to issue default notices against you.
Some creditors will record the fact that you have a reduced payment agreement on your credit file.
Can all your debts be included
A debt management plan is generally suitable if you have standard banking debts.
Typically these are things such as a bank loan or overdraft, credit cards and store cards.
However, this option is generally not suitable if you have the following types of debts:
- Tax debt owed to HMRC can’t normally be included. This is because HMRC will normally require their debt to be repaid much sooner than would be the case in a DMP.
- It can be difficult to include CCJ (County Court Judgments). In these circumstances a change to the existing payment arrangement would require agreement from the Court.
- Business debts such as money owed to trade suppliers. These are difficult to include as suppliers will often decide to take legal enforcement action. A DMP give no protection from such action.
Is your house affected?
Where you are a home owner, a debt management plan can be a good solution.
The reason for this is that you will not be required to release any equity from your property to help repay your debt.
However you should also be aware that a DMP gives you no legal protection.
This means your creditors could continue to take against your home in the form of applying for a legal charge. If granted this would secure their debt against the property.
Reduce Monthly Payments
Payments are based on what you can afford
One Simple Payment
Single monthly payment shared between creditors
Flexible & Informal
Increase payments or settle early at any time
Credit Rating Impact
Missed payments and defaults likely
What Happens To
Your Credit Rating?
If you start a debt management plan, you will stop making your normal monthly payments to your creditors. This means that your accounts will go into arrears or further into arrears.
As a result your creditors will record missed payments on your credit file. They are also likely to issue you with a default notice which will also be recorded.
These things will have a negative effect on your credit rating and make it more difficult for you to borrow money in the future.
Your credit rating will not start to improve until you have paid your debts in full or settled them with lump sum payments.
Although it is an informal debt management agreement, a debt management plan is likely to affect your credit rating as badly as any of the other debt solution options – for example and IVA or bankruptcy.
How Much Does A Debt
Management Plan Cost?
You can normally get a debt management plan for free. There are two ways you can do this:
1 Set up the plan yourself
Because a debt management plan is an informal agreement, there is nothing to stop you setting one up yourself.
This involves you negotiating reduce payment amounts direct with each of your debts.
The main downside of setting up you own plan is you will still be left with multiple payments to manage.
2 Use a free to consumer DMP organisation
There are a number of organisations who will assist you to set up a debt management plan for free.
The main one are the Step Change debt charity. Your local Citizens Advice Bureaus (CAB) may also be able.
Using one of these organisations will mean you only have to make a single affordable payment each month. They will then divide this between your creditors.
Note: Step Change is unable to help you if you are self employed or living abroad. In these circumstances, you will need to consider using a commercial debt management company.
A professional company will normally charge you an ongoing Management Fee.
The Management Fee which is typically between 15% and 17% of your monthly payment (although it may be subject to a minimum or maximum amount). This fee is deducted from your monthly DMP payment.
Most Debts Can Be Included
Suitable for loans, credit cards and overdrafts
Interest May Be Frozen
Creditors often stop interest and charges
No Asset Release
You keep your home and car
Informal Arrangement
Creditors are asked to agree to the plan
Advantages of a
Debt Management Plan
There are various advantages of using a debt management plan. Whether they are relevant to you will depend on your individual circumstances.
1. Quick to implement
A DMP allows you to start making reduced payments to your debts immediately.
The payments you make next month could be your first DMP payments putting you straight back in control of your money.
Collection letters and phone calls from your creditors will take 2-3 months to reduce.
2. Private solution
Because it is an informal solution, anyone can start a DMP. There is no formal register of DMPs and no-one other than your creditors will know about the agreement.
For this reason starting a DMP is very unlikely to affect your job.
3. Credit card interest frozen
Once your plan is in place, most credit cards will freeze additional interest and charges. This will mean that the balances are not going up each month.
Note: Unlike more formal debt solutions, your creditors are not legally obliged to freeze interest and charges. As such this can’t be guaranteed.
4. Flexibility
Once you have started a DMP, you can increase your payments at any time if your situation improves. You can even pay off your debt in full if you get a windfall.
If you are able to save a small lump sum, it is possible to pay off a single creditor while leaving the others in your plan. This process is sometimes called snowballing.
The advantage of doing this is that the remaining creditors are paid fasted and the length of your DMP is significantly reduced.
5. No need to release home equity
If you are a home owner you can use a DMP without having to release any equity from your property.
Disadvantages of a
Debt Management Plan
It is important to understand that using a debt management plan can also have some disadvantages. Before making a decision to use this debt solution, you need to understand these in the context of your circumstances.
1. Extended repayment period
When you use a DMP, you still have to repay 100% of your outstanding debt. This means the plan can last a long time.
The reason for this is that you will be making reduced payments. As such the time it takes for you to repay your debt will be significantly extended even if interest charges are frozen.
The typical length of a debt management plan is between 5 and 10 years.
2. Not all debts can be included
It is not usually possible to include tax debt in a debt management plan.
In addition, it will be difficult to add debts where a CCJ has already been issued or bailiffs are involved in the debt collection process.
In these circumstances, you might need to chose a more formal legally binding debt solution such as an IVA or bankruptcy.
3. Interest and charges not automatically frozen
Once you are in a DMP, your creditors will often agree to freeze interest and late payment charges. However, they are not obliged to do this.
Where interest and charges continue to be added to any of your accounts, this will add considerably more the that amount that you have to repay and the time your plan lasts.
If you maintain your DMP payments regularly, your creditors should be persuaded to suspend these charges. However they are not legally obliged to do so.
4. No legal protection from creditors
A DMP is not a legally binding solution. This means that even if you maintain your agreed payments, your creditors may still decide to take legal action against you to enforce repayment of their debt.
This could include applying for a CCJ against you followed by a Charge against your property, a wage attachment or even a petition for your bankruptcy.
5. Negative effect on credit rating
If you start a debt management plan, your credit rating will become significantly worse.
Your creditors will record missed payments on your credit file and issue default notices against you.
This will result in your credit rating becoming significantly worse which will mean you find it much more difficult to take new credit agreements.
Your credit rating will not normally start to improve until you have paid your debts in full or settled them with lump sum payments.
Let's Talk
If you need advice and help with your personal debt, get in touch with us today. Talk to us in confidence. Take control of your finances. Get on the way to becoming debt free.
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