A debt management plan (DMP) is an agreement between you and the people or companies you owe money to.
If they agree to it, you will make reduced monthly payments towards the debt you owe.
In this guide, we’ll explain everything there is to know about debt management plans – so you can decide if a DMP sounds like the kind of debt solution you’d like to explore in more detail.
If a debt management plan sounds like it could help, we’ll also explain everything you need to know about how to discuss this kind of plan with your creditors.
What is a Debt Management Plan?
To use financial language, a debt management plan is an informal agreement between you and your creditors.
If a DMP is set up, you’ll make one monthly payment which a DMP provider (sometimes called a ‘credit counselling agency’) will divide between all of your creditors.
In plain English, this means it’s a plan that the people or companies you owe money to may agree to, but it’s not legally binding.
That means the companies could still chase what you owe or you to court to try to recover their money – although this is less likely with a DMP in place.
Since a DMP is not legally binding, it also means you’re not locked into the agreement – so there’s no minimum period, and you can cancel at any time.
It’s important to understand that debt management plans can only be used for certain kinds of unsecured debts.
If you have secured debts or priority debts, these creditors will not agree to a DMP.
Examples of debts that can be considered for a DMP:
- Unsecured loans
- Payday loans
- Student loans
- Water bill arrears
- Credit cards
- Store cards
Examples of debts that a DMP is not suitable for:
- Mortgage or rent arrears
- Gas and electricity arrears
- TV licence or missed TV licence payments
- Council tax or rates arrears
- Magistrates’ court fines
- Income tax or VAT arrears
- Missed maintenance payments to an ex-partner or children
Debt Management Plan Pros and Cons
If you’re thinking about a debt management plan or other debt solutions, it’s important to have all the information so you can decide whether it looks right for you.
Here, we’ve listed the pros and cons of debt management plans, so you can decide for yourself:
Pros
No dealing with creditors
A DMP provider will communicate with all your creditors. This means you don’t have to organise it yourself, and the DMP provider will handle all communication for you going forward.
This can be a huge relief if you’re tired of constant chasing from companies you owe money to.
Possible freezing of interest and charges
Interest rates are usually quite high on unsecured debts, so some creditors agree to freezing interest and not adding additional charges if you’re making consistent monthly payments through a DMP. This isn’t guaranteed though – so not all companies will necessarily agree to this.
Credit score benefits
All debt solutions will be recorded on your credit file and will therefore reduce your credit score.
However, making debt repayments through a debt management plan will not have as much impact on your score as other formal solutions or simply ignoring the problem and ending up with a county court judgement.
One single monthly payment
If the debts you’re struggling with are all unsecured, then you’ll only need to make one payment each month instead of making multiple payments.
This will then be shared between all your creditors on your behalf and can really help with personal budgeting.
Affordability
The DMP provider will make sure you’re only paying what you can afford. This may mean some slight differences in luxury spending going forward – but it will always leave you with enough to cover living expenses.
No insolvency-related restrictions
Some formal debt solutions have an impact on a person’s ability to work in certain industries or hold certain positions in a company.
Since debt management plans are not a formal insolvency solution, you will not face any of these restrictions or difficulties.
Cons
No legal protection
Since your creditors are not legally bound by a DMP, they don’t have to abide by the strict rules of an IVA or bankruptcy.
They may still contact you to see if you can pay more, and they can still pursue the debt through the courts if they decide they want to.
More likely to be rejected by some creditors
With some debt solutions (such as an IVA or bankruptcy), as long a majority of your creditors agree to it, the rest have to accept it.
This is not the case with a DMP – each creditor can disagree if they wish. This means you may be left with debts that are not included, which you’ll need to handle yourself.
Reduced credit score
Although a debt management plan won’t damage your credit rating as much as bankruptcy or an IVA, it will still have a significant impact.
This is because you will typically pay reduced payments compared to what you initially agreed to with your creditors.
Longer term compared to some other solutions
Debt management plans can last for a long time – especially compared to IVAs or bankruptcy. It’s not uncommon for a DMP to last up to 10 years.
This is because you’re paying off all of what you owe – not just as much as you can afford until the plan is over.
More to pay off
Since none of your debt is written off by a debt management plan, you’ll typically end up paying more off than you would with an IVA or bankruptcy.
Why choose Creditfix?
- Write off unsecured debts over £6,000
- Stop interest and charges soaring
- Reduced payments from £110 per month
How do you set up a debt management plan?
Debt management plans have to be set up by a credit counseling agency. This is a service that’s often offered by Insolvency Practitioners – so they can help you decide if a debt management plan is right for you and talk you through the pros and cons of other options too.
If you decide that the debt management plan is the right choice for you, the provider you choose should help you work through the next steps.
This will usually involve encouraging you to identify your priority debts and making a personal budget to make sure you’ve got enough to cover a month’s payments.
Assuming you like the provider you’re talking to and feel like they’ll do a good job on your behalf, they’ll put together a DMP agreement or contract that you should then read through carefully to make sure you understand exactly what you’re committing to.
Debt Management Plan: Pros and Cons – Conclusion
Since everyone’s financial circumstances are a little different, it’s useful to understand the advantages and disadvantages of debt management plans so you can decide whether you’d like to explore a DMP or possibly consider another option.
The main benefits of a DMP include no direct dealing with creditors, possible freezing of interest and charges, less impact on credit score compared to other formal solutions, a single monthly payment, affordability, and no insolvency-related restrictions.
However, DMPs also have some downsides – such as no legal protection, potential rejection by some creditors, reduced credit score, longer terms compared to other solutions, and no debt write-off.
If you think that a DMP could be the thing to help you get your financial life back on track – finding a reputable and trustworthy service that will answer all your questions is a great next step.
