How does a Debt Management Plan work?

A DMP works as a mechanism for repaying non-priority debts. Non-priority debts include personal loans, credit cards, and store cards. 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.

Content relating to Debt Management Plans is for information purposes only. Carrington Dean does not offer this solution to its clients.

How do you apply for a Debt Management Plan?

Step 1: Choosing a DMP company, or doing it yourself

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: Setting out a realistic payment plan

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: Sharing your DMP proposal with your creditors

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: Keeping up with monthly payments

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.

How much does a Debt Management Plan cost?

• 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 might 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.

How much does a Debt Management Plan cost?

In some cases, you will be charged a fee by your DMP provider, although there are debt charities out there that offer them for free – you can find more information on sites like Money Advice Service.

For those who choose a debt management company, their DMP will come with a fee, and may last longer than those that are free. Any fees charged are usually to cover the costs of administering your arrangement and working on your behalf to contact those you owe money to.

The fees are usually taken as a percentage of your monthly payment and can be anywhere up to 50%. Should you decide to cancel at any point, you may not get this refunded. As such, it’s important to do your research and get free debt advice before making any decisions.

Does a Debt Management Plan affect your credit rating?

Unfortunately, a DMP will always have an effect on your credit score because, in most cases, your payments will be less than the minimum set out in the original agreements.

It’s also common for the companies you’re paying to put a flag next to your account on your credit file. This will show to others that whilst you are paying the debt, you’re paying it through a DMP and often is flagged if you miss any payments.

Applying for any new credit will also become harder due to your DMP, but any damage to you credit score is likely to be temporary. If you successfully complete your arrangement, the DMP will be wiped from your credit history after six years and you will be free to start rebuilding your credit score.

Can I add debts to a Debt Management Plan?

When you’re dealing with a number of debts, it’s easy to forget one – even more so if you haven’t heard from them in a while. If you’ve accidently left a debt out of your DMP, make sure to let your provider know as soon as possible.

Including all your unsecured debts in your plan helps to make sure that they’re all being treated fairly. This then goes in your favour when proposing the DMP, so it’s important to make sure you haven’t missed anything when setting it up.

You can do this by checking your credit report for details of any debts you’ve had over the past few years.

Is an IVA better than a Debt Management Plan?

IVA – formal debt solution

An Individual Voluntary Arrangement (IVA) is another debt solution that would allow you to repay your debts through one monthly payment. The main difference between an IVA and a DMP is the plan length and the level of protection from creditors.

An Individual Voluntary Arrangement is a formal debt solution. When you enter an IVA, you are striking a legally binding agreement with your creditors. This means they will no longer be able to contact you while for the length of the IVA, which usually takes 5 years.

An IVA is also only available in England, Wales, and Northern Ireland. The equivalent in Scotland is a Trust Deed.

DMP – Informal debt solution

A DMP is an informal solution. You can use it to pay back non-priority debts like credit card debt, but you won’t receive any protection from creditors. There is also no fixed length of a DMP, however they tend to last longer than an IVA or Trust Deed because they don’t involve a debt write off. DMPs are also available in Scotland, unlike IVAs.

If you are wondering whether you should use a formal or informal debt solution to repay what you owe, you should seek debt advice to help you come to the best decision for you.