Debt Management Plan Pros and Cons
In a debt management plan (DMP), your creditors agree to accept lower monthly payments over a longer period of time to help you pay off your debts. Some creditors might agree to help you by freezing interest and fees on your current debts, but this is not guaranteed.
Below we outline the major advantages and disadvantages of DMPs, so you can make a more informed decision about whether this debt solution is the right one for your circumstances.
Choosing a DMP to deal with your debts offers a number of benefits:
- Relief from Creditor Harassment
If your creditors agree to accept your DMP proposal, you can expect them to significantly reduce their contact with you. If they are happy with the revised repayment plan, they will no longer need to harass you for payment.
- Better for your Credit Score
Whatever the situation, struggling with debt will have a negative effect on your credit score. When you begin a DMP, the fact that you are paying less towards your debts each month than you had originally intended will be recorded on your credit file. However, taking this action also demonstrates your willingness to deal with your debts without resorting to formal insolvency, so can be better for your credit score in the long run.
- Reduced Monthly Payments
The main benefit of a DMP is that the plan will reduce the amount you pay towards your debts each month. This will free up money for essential living expenses, making you less likely to resort to further credit, hence hopefully ending the vicious cycle of problem debt.
- Avoiding Formal Insolvency
A DMP is an informal solution, meaning it is not legally binding. This can be an advantage since it means that your details will not be recorded on a public insolvency register. This means you will not face the sanctions associated with formal insolvency, which can at times limit your employment options and, with bankruptcy, put your assets at risk.
However, there are some drawbacks to keep in mind:
- DMPs are not Legally Binding
Although the informality of a DMP can be beneficial in some ways, it can also be a drawback. Although you can expect to have less communication with your creditors once a DMP is in place, they are not legally obliged to cease contacting you as they would be in a formal plan such as a Trust Deed or IVA. Because your creditors are not legally bound by the terms of a DMP, they could also decide to stop the plan at any time, and are not under any obligation to freeze interest and fees on your debts.
- Creditors could reject your DMP Proposal
Another drawback of a DMP is that all of your creditors have to agree to its terms in order for it to go ahead. With IVAs and Trust Deeds, on the other hand, if a certain proportion of creditors accept the proposed repayment plan, all are bound by it.
- DMPs take longer to complete
DMPs last for considerable longer than other debt solutions. There is no fixed length for a DMP, but they can occasionally exceed 10 years. Formal plans tend to write off debts in a much shorter time frame. For instance, Trust Deeds typically last for five years, whilst IVAs usually last for six.
- DMPs can be more expensive than other Solutions
With a DMP, you will be expected to pay off your debts in full, making them considerably more expensive than formal solutions, which will write off a proportion of your debts. Your creditors might not agree to freeze interest on your debts either, which can quickly add up and add to the length of your plan. If you choose to organise a DMP through a private company, you will also be expected to pay administrative fees on top of your monthly debt contributions.
If you think a DMP might be the right solution for you, but you would like to discuss your options further, call a friendly Creditfix advisor on 0808 2085 198. To learn more about DMPs, click here.