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17/09/2021

Debt Management Plan or Debt Relief Order?

17/09/2021

Debt Management Plan or Debt Relief Order?

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Debt Management Plans and Debt Relief Orders are both debt solutions that allow people to get rid of problem debt, but what’s the difference between the two? And which would be the best fit for your financial circumstances?

In this guide we’ll explore what Debt Management Plans and Debt Relief Orders are, what the difference are between the two, and give you the information you need to choose the right solution for you.

What are Debt Management Plans and Debt Relief Orders?

How does a Debt Management Plan work?

A Debt Management Plan (DMP) is an informal debt solution that allows you to negotiate lower debt repayments with your creditors, either personally or through a third party.

The idea is to come up with a debt payment plan that’s based on what you can afford, and that satisfies all parties. The debt repayments are divided between your creditors and last as long as it takes for your debts to be repaid in full.

How does a Debt Relief Order work?

A debt relief order (or DRO) is an agreement that helps people with debt and low income pay back what they owe over a longer period of time. formal debt solution, which means you enter a legally binding agreement

Available anywhere in England, Wales, and Northern Ireland, a DRO freezes interest and charges for a year, allowing people a year-long break from making debt repayments. If you’re situation hasn’t improved after 12 months, your remaining debts will written off.

What is the difference between a Debt Management Plan and a Debt Relief Order?

Total unsecured debt

There is no fixed limit on the amount of debt you can include in a Debt Management Plan. If you have a certain level of debt you think it will be easier to pay over an extended period of time, then a DMP may be a viable debt relief solution for you.

With a DRO, there is a limit on the amount of debt you can carry. You can apply for unsecured debts of up to £30,000 to be included in the arrangement, which you will then make a monthly contribution towards.

Monthly payments

You will make monthly payments throughout a DMP, and the level of your monthly payments, as well as how long they last, depends on your financial circumstances. An Insolvency Practitioner or debt adviser will be able to help you work out a budget based on your monthly disposable income, and taking into account priority debts like household bills.

If you are granted a DRO, you won’t need to make repayments towards your debts for a period of 12 months. You will only need to make monthly payments if your financial situation improves in that time.

Credit file

There’s no real difference between the two debt solutions when it comes to impacting your credit score (or credit rating). Regardless of whether you enter a DMP or are accepted for a Debt Relief Order, the arrangement will be listed on the individual insolvency register.

It will also be listed on your credit report, which details your financial history, for a period of six years. This could make it difficult for you to take actions like opening certain bank accounts, apply for credit cards, or be accepted for a mortgage.

What is the eligibility criteria for a DRO or DMP?

Debt Management Plan

There are no strict eligibility criteria for a Debt Management Plan. If you’re a resident in Scotland, you owe money you can’t pay right now because of your current financial situation, but you think you’ll be able to pay it back over a longer period of time, you will be eligible to apply.

It is worth pointing out that you can only include unsecured debts in a DMP. If you have secured debts like a mortgage or rent payment to maintain, you should continue paying them alongside your arrangement.

Debt Relief Order

To be eligible for a Debt Relief Order (DRO), you must meeting the following criteria:

  • Be a resident of England, Wales, or Northern Ireland
  • Have total debts of no more than £30,000
  • Don’t own your own home
  • Don’t have access to other assets
  • Have very little disposable income with which you can repay the money you owe

Most forms of unsecured debt can be included in your Debt Relief Order. Debt that do not qualify include child maintenance payments, court fines and other debts related to criminal activity, as well as student loans and social fund loans.

Does a Debt Relief Order clear my debts?

It depends on your financial situation. The idea behind Debt Relief Orders is that you are given a 12 month reprieve from creditor pressure, and can use that time to sort out your finances.

If your situation improves during the year-long order, to the point where you have more disposable income, you may be asked to begin making a small monthly payment towards your debts.

If after a year you find your finances haven’t improved, you won’t be asked to make a monthly contribution towards your debts. Instead, your remaining debts will be cleared.

How will I know which debt solution is right for me?

Debt management companies

A licensed debt management company helps people struggling with debts regain control of their financial situation. They typically offer free debt advice and guidance, can help you set up a budget and priortitise bills, and can even deal with creditors and lenders on your behalf.

In the most serious cases, debt management companies can place people in debt solutions, like Debt Management Plans, which allow people to consolidate their debt and repay what they owe through a series of affordable monthly payments.

Debt charities

Debt charities like the money advice service (now Money Helper) and Stepchange debt charity, act as a free resource for people in debt. They can offer debt and financial advice, and might even be able to set you up with a debt solution like a DMP free of charge.

While free debt management services is undoubtedly a benefit of using a debt charity, there is often a long wait for their services because they cannot cope with the same amount of cases as some of the bigger providers.

Where can I find debt advice support?

For people with serious debt problems, the stress and anxiety of dealing with debt can filter into every aspect of everyday life.

Nobody should have to face debt alone, and you don’t have to. Creditfix are the UK’s biggest provider of Individual Voluntary Arrangements and can talk you through a range of debt solutions that will help you deal with your debt at an affordable rate.

To take action on debt and kick-start your journey to debt free, talk to one of our friendly advisers today on 0800 0431 431.