Charity Debt Management Plans
Choosing a Debt Management Plan (DMP) provider is a big step towards getting your finances back on track. One major decision is whether to choose a charity to administer your DMP, or to pay for a private firm to oversee it. Below we talk about both options to help you make an informed decision.
A number of UK charities offer DMPs, the two biggest providers being PayPlan and StepChange. These two charities are funded by creditors themselves, leaving them free to offer DMPs without charging their customers. This means that, by setting up a DMP with a debt charity, every penny of your monthly contribution will go towards clearing your debts, rather than paying administrative fees.
This can certainly be an advantage when it comes to paying off your debt, since not having fees to contend with will lower the amount you ultimately pay. This could also reduce the length of the DMP, which is another significant advantage. Charity DMP providers will also help you to work out a household budget, which allows them to figure out how much you could afford to pay to your creditors every month as well as helping you to manage your finances for the duration of the plan.
Despite these advantages, there are some issues to bear in mind. Most charity debt providers will only provide help on the condition that you do not apply for further credit throughout the course of the DMP. Doing so would violate the terms, and creditors could end up stopping the DMP.
There are plenty of options to choose from if you decide to choose a private provider for your DMP. Many providers argue that they are able to offer you a better service than their charity counterparts because of the greater funding which comes with charging fees for their services.
Additionally, because these companies are funded by customers rather than creditors, commercial debt management providers often suggest that they have more of an incentive to negotiate in the customer’s best interests – whether this means attempting to secure lower monthly payments, or persuading creditors to freeze interest on debts.
On the other hand, if you choose to go through a fee-charging DMP provider, a percentage of each of your monthly payments will go to the company rather than towards clearing your debts. There are no standardised rules in place to determine how much a DMP provider can charge, but the Financial Conduct Authority (FCA) suggests that no more than 50% of your monthly payments should be taken as fees, and that the administrative costs should be spread over the duration of the plan. After the first six months, the percentage which creditors receive of your payment should increase, too. Paying a fee every month necessarily limits the amount which your creditors receive, so paying off your debts this way can be a far longer process.
For more advice about whether a DMP could be the right plan for you, contact a friendly Creditfix advisor by calling 0808 2085 198.