What is a Debt Management Plan?(DMP)
A Debt Management Plan (DMP), is a way for someone struggling with their unsecured debt repayments to reduce the amount paid monthly. Here are some key facts about DMPs:
- A DMP is an informal debt solution, which means it is not legally binding, unlike a Trust Deed or Individual Voluntary Arrangement (IVA), Bankruptcy or Sequestration.
- A DMP is put in place when either you or a third party negotiate lower monthly repayments with your creditors.
- The repayment proposed is based on what you can reasonably afford which is worked out through an analysis of your monthly budget.
- These lower repayments are usually paid over a longer period of time than the contractual repayment term.
- You will end up repaying the full value of your debt with a DMP.
- Creditors might agree to freeze interest and fees on your debts in a DMP, but this is not guaranteed
- Private debt management companies will charge a fee for negotiating and administering a DMP, but some debt charities offer this service for free.
- DMPs are usually flexible – if your circumstances change, the amount of your monthly repayments can normally be revised
A DMP can be a good solution for individuals struggling to keep up with the repayment of unsecured debt, but who could afford to consistently pay smaller monthly instalments, and whose circumstances are likely to improve in time
Are You Eligible For A Debt Management Plan?
A debt management plan could be the right solution for you if:
- There is no minimum or maximum amount of debt needed to enter a debt management plan
- You are struggling to keep up with the cost of your current monthly repayments
- You have a steady and relatively stable income
- You could afford to make lower monthly contributions over a long period of time
- You can afford to pay your priority debts (mortgage, rent, council tax etc)
- You feel able to pay of the full value of your debts over an extended period of time
You require short term management of your unsecured debts
The Debt Management Plan Process
The exact nature of a debt management plan varies from case to case, but you can expect its course to follow these steps:
Select you DMP provider
You can negotiate a DMP with your creditors yourself if you choose without using a third party.
If you opt to use a DMP company, an advisor will represent your interests, and remove the stress of direct contact with creditors. A number of debt charities offer DMP services free of charge.
Work out your budget
Next, you must work out how much you can afford to pay in your monthly instalments, by carefully analysing your budget.
If you chose to use a DMP provider, this will involve providing pay slips, bills, and other documents, so that the amount you can afford to pay after essential costs can be calculated.
Submit a suggestion to creditors
Your budget will then be shown to your creditors, who will decide whether or not to accept your new monthly payments. If they accept, they may also agree to freeze ongoing interest and/or charges as a gesture of goodwill.
Make your new monthly payments
If your creditors agree to your new reduced payments, the final step is simply to keep up with them.
If you chose to use a DMP provider, you will make your monthly payment to them rather than directly to your creditors.
This means you have only one payment rather than several, which can make things much more manageable.
Debt Management Plan Advantages
Debt management plans have a number of advantages:
- Being an informal solution, no record of your DMP will appear on a public insolvency register
- Creditors are likely to look favourably on your proposed DMP, since it demonstrates you are willing to deal with your debts and pay them in full
- Creditors will consider freezing interest and charges on your debts
- Most DMPs are flexible enough to allow for adjustments in payment based on changing circumstances
- DMPs reduce your monthly debt repayments
- You will likely have less contact with your creditors, especially if you choose to use a third party DMP provider, as they will often be able to speak to creditors on your behalf
Debt Management Plan Disadvantages
DMPs are not a cure-all for debt, and there are certain disadvantages to be aware of when considering one:
- It can take a long time to repay your debts with a DMP
- Your creditors are not obliged to freeze interest or fees on your debts
- You are still liable for the full value of your debt
- Your credit rating could be negatively affected, making accessing further credit more challenging and expensive
- There is no guarantee that creditors will accept your offer of reduced payment
- Creditors are not prevented from taking legal action against you
- During a DMP, creditors can still contact you, unlike with a legally binding solution such as an IVA or Trust Deed
- Some companies which offer DMPs charge fees for them, which may further extend the period of the DMP