The top 5 most asked questions about DMPs
What is a debt management plan?
Before we get into the most common questions relating to debt management plans, it’s important to understand what they are and how they work.
A debt management plan or DMP for short is an informal agreement that allows those struggling to repay debts to lower the amount they are paying, to one that is more affordable, and in line with their income.
Those in poor financial health—whether through overspending, unexpected expenses or a change in circumstances—may need help reorganising how to pay off their many different debts. A debt management plan is one option available.
A plan that combines all of your unsecured debts
Your DMP will combine each of the unsecured debts you’ve accumulated, and your debt management provider will liaise with your different creditors to try and arrange more preferable terms. They then work out a single monthly payment to cover your combined debt, that you can afford to pay.
Unsecured debts include personal loans, credit card bills, store cards, utility bills and more. Unsecured debt is any loan or credit that isn’t secured by some form of collateral.
The advantages of a debt management plan
- Your DMP provider will take over the communication with your creditors.
- The plan is informal and flexible, designed to work around what you can afford.
- You won’t feature on the insolvency register.
- You will pay back all of your debt.
- Your property will not be used as collateral, nor will you have to release any equity you have earned.
- A DMP is a preferred creditor option.
- Fees and interest charges on individual debts are often frozen.
The disadvantages of a debt management plan
- You will be repaying your debts over a longer term.
- The total debt amount to be paid may be more than the sum of the existing debts.
- A DMP may affect your credit file for some time after completion.
- All debts must be repaid in full.
The top 5 questions when it comes to debt management plans:
1. What does a debt management plan cost?
Depending on who you choose to manage your plan, you could expect to pay a single set-up fee, a monthly management fee, or it could be handled completely free of charge.
Debt charities are available specifically to help people manage their financial problems. These companies are funded by outside investors, which means the help they provide can be completely free of charge.
Professional agencies are experts in the field of debt management and expect to be paid for their in-depth knowledge and experience.
If you’re paying a fee to your provider, make sure you’re aware of what you’re paying. You could be expected to pay up to 15–17% of your monthly fee to a commercial debt manager.
2. How long will a debt management plan last?
The length of your plan will be dictated by the total amount you owe and the amount you can afford to pay each month.
Hopefully, if your DMP provider arranges more preferable terms with your creditors, freezing interest charges and additional fees, this could be the same term as the original debts, or sooner.
Generally speaking, if you’re having trouble repaying debts, you’ll have to opt for much lower payments to make them affordable within your budget. By doing this, it’s likely to extend the term you’ll be paying off those debts.
A DMP is a flexible plan, so if you find yourself with a little extra money, or there are changes to your regular income, they can be paid into the plan at any time, bringing your expected completion date forward.
3. How do the DMP providers work out the monthly instalments?
The amount your provider calculates to be your monthly repayment will be dependent on every aspect of your current financial situation.
Your total income (whether in wages, a pension or benefits) will be considered against your total monthly outgoings. Your repayment amount will be low enough so you can still live an acceptable quality of life.
Your budget should include every aspect of your daily life. Food, clothing, heating and transport will all be taken into account. It’s up to your provider to decide what is considered excessive and what isn’t, so when you’re applying for help, make sure you include everything you can think of.
You won’t be able to apply for any costs that apply to your business if you’re self-employed or a business owner.
4. Can I get out of a debt management plan?
Because a DMP is a flexible arrangement, designed to handle any changes to your income or personal position, you can leave your debt management plan at any time.
You may have come into a sum of money great enough to pay off your debts in full or decide that an alternative method of debt repayment is preferential. Either way, your provider will outline what you will have to do to transfer your debt to another method or to pay it off.
5. How does a debt management plan affect credit scores?
Your DMP will not affect your credit file directly, but you will receive Default Notices.
Default Notices are issued when you miss a payment, make an incorrect or late payment. They are issued to alert other lenders of your failure to repay the credit in line with the terms you accepted it.
As you pay into a debt management plan, every one of your payments, despite being pre-arranged, is considered a reduced amount of the initial debt, and therefore incorrect. This will create the continual issue of Default Notices. Default Notices can remain on your credit file for up to 6 years from their issue date.
Alternatives to debt management plans
If a DMP doesn’t sound right for you, then you may want to consider the many other options available, such as an Individual Voluntary Arrangement or Bankruptcy. There are a variety of different solutions to debt problems, each suited to different levels of financial health and the total debt amount.
For the best course of action for your specific circumstances, always speak to an expert. Our highly qualified and specialist staff are ready to listen, offering the best possible options give us a call on 0808 2234 102 today.