DEBT SOLUTIONS
Debt Management Plans
DEBT SOLUTIONS
Debt Management Plans
What is a Debt Management Plan?
More commonly known as a DMP, a Debt Management plan is an informal solution for an individual’s unsecured debts. It is not legally binding and generally last as long as it takes for the debts to be fully repaid.
A DMP allows an individual or a third party to negotiate your monthly payments in order to make them more manageable. The payments are divided between your creditors and, much like and IVA or Trust Deed, are based on what you can reasonably afford.
The debts are fully repaid in a DMP, so they often vary in length depending on the individual’s debt level and how much they can afford to pay.
In order to apply for this solution, individuals have to meet a certain criteria. They must have a steady, stable income and be able to afford to make a monthly payment. It’s also important that they have a good relationship with their creditors as if there are ongoing issues, the creditors might not accept the proposed DMP.
What kinds of debt can be included in a Debt Management Plan ?
Typically, DMPs are for your unsecured debts, such as:
- Overdrafts
- Credit/store card
- Catalogues
- Bank/personal loans
- Utility bill arrears
Step 1
The first step is to decide whether you are going to organise a DMP yourself or through a third party.
If you choose to use a DMP company, they will then act on your behalf and deal with your creditors for you. Many debt charities will offer this service for free, however some companies will charge you a fee.
Step 2
The next step is to work out how much you can afford to pay by creating a realistic budget.
Look at your payslips and bank statements to get the best understanding of where your money goes – creditors may also ask to see these documents as proof of your affordability.
Step 3
Once you have completed a budget and calculated what your payments will be, this will be shown to your creditors. The more evidence you supply, the more likely they will be to understand and accept your proposal.
Creditors may also agree to freeze interest and charges on your debts, however, this is not guaranteed.
If they reject your proposal, you may find that you are more suited to alternative debt solutions such as an IVA or Trust Deed. Creditors may also lose confidence in your ability to pay and take legal action against you.
Step 4
Now that creditors have agreed to your DMP, all you have to do is keep up with your payment schedule. If you have used a third party, your payments will be made to them and they will distribute the money to your creditors.
Should your circumstances change at any point, it is important to communicate this with your creditors and/or your DMP company so that your plan can be altered.
Advantages
- As it is an informal solution, there will be no record of your DMP on any public insolvency register, meaning the plan is confidential between yourself and your creditors.
- It can help to build up a good relationship with your creditors as you are demonstrating that you are actively dealing with your debts.
- This in turn can mean you will have less contact with your creditors
- Gives you a better sense of control over your finances
- DMPs are considered to be a flexible debt solution, which can allow for the arrangement to be adapted should your circumstances change; whether this is for the better or worse.
Disadvantages
- Unlike other debt solutions, DMPs have no set time limitations and no debt is written off; meaning that it can take many years to pay off your debts.
- It isn’t guaranteed that interest and charges will be frozen, so your debts can continue to grow.
- Creditors may reject your offer, which means they may start more serious proceedings against you
- Although it is possible that you will have less contact with your creditors, they are still able to contact you – unlike other debt solutions that make it legally binding for them not to.
- If you opt to use a third party, you may be charged a fee to organise a DMP, which can make the length of your arrangement even longer.
Why Carrington Dean?
Living with debt is a difficult task, and it’s always easy to feel like you have to deal with it on your own.
Here at Carrington Dean we want to help you address the elephant in the room and break down the stigma surrounding debt. Our friendly advisers are always on hand to offer you advice and guidance, no matter what walk of life you come from.
Frequently Asked Questions
DMPs are not legally binding, meaning you are not tied into anything for a minimum period and can cancel at any time.
However, this also means that your creditors are not bound by the agreement. It isn’t guaranteed that they will freeze the interest and charges on your debts, and you can still be contacted by them.
The length of a DMP can vary, but they tend to be in the region of 5 to 10 years.
There are numerous factors which can affect the length of a DMP, such as your overall debt level, how much your payments are and whether the creditors agree to freeze interest or not.
Being in a DMP will more than likely affect your credit file and score. This is because you could be paying less than a creditor’s requested minimum payment amount.
There isn’t a specific place in your credit report to register that you are on a DMP, but the debts that are included can have a marker added to show that you are making payments through one. This may reduce your chances of obtaining credit whilst in your arrangement, as it shows that you are having difficulty keeping up with repayments.
However, a DMP does look better on your credit file than having unpaid debts and defaults showing.
Your credit file holds a record of your credit activity for the last 6 years, so any evidence of a DMP – details of court action, defaults or missed payments – will not be removed from your record until six years after your final payment was made.
Unfortunately, assets such as your home or car cannot be included in a DMP due to them being secured debts.
Payments for your mortgage or car finance should be included when you are working out your budget for your DMP. This will allow you to pay for your secured debts first and reduce the risk of losing your home or car.
Creditors may also agree to freeze interest and charges on your debts, however, this is not guaranteed.
If they reject your proposal, you may find that you are more suited to alternative debt solutions such as an IVA or Trust Deed. Creditors may also lose confidence in your ability to pay and take legal action against you.