DEBT SOLUTIONS
Debt Management Plans – Help & Advice
DEBT SOLUTIONS
Debt Management Plans – Help & Advice
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.
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.
What debts can be included in a Debt Management Plan?
Typically, DMPs are for your unsecured (non-priority) debts, such as:
- Overdrafts
- Credit/store card
- Catalogues
- Bank/personal loans
- Utility bill arrears
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.
What are the advantages of a Debt Management Plan?
- 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.
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.
Are Debt Management Plans available in Scotland?
It is possible to get a DMP in Scotland, however the majority of people benefit more from the Debt Arrangement Scheme (DAS).
This solution works pretty much the same as a DMP but is actually legally binding and guarantees the interest and charges on your debts are frozen. If your DMP has been rejected, DAS can actually be a great back up option as changes to the legislation surrounding it means your proposal is almost guaranteed to be approved.
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.
How long does a Debt Management Plan last?
The length of your DMP will depend on a number of factors, although they usually last between five to ten years. Things like your debt level and how much you can afford to pay will help your provider to work out how long your plan would be.
If it seems like it will take you longer than ten years, even with the reduced payments, then it might not be the best idea for you. In cases where your lenders agree to have interest and charges frozen, your plan can be drastically reduced.
It’s also possible to shorten your DMP if your situation improves and you are able to increase your payments.
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 creditors refuse a Debt Management Plan?
Yes. Unfortunately, a DMP is not legally binding, and the people you owe money to are under no obligation to agree to the plan. That said, if it seems like the best option to get back what they’re owed, then they may be more inclined to agree.
There’s lots of reasons why creditors might reject your DMP proposal, but the most common reason is because, in their eyes, they aren’t getting enough paid back.
To increase your chances, you need to make sure you put forward a fair and reasonable proposal. Your DMP provider will usually draft this up for you and send it to your creditors on your behalf. Including a copy of your income and expenditure is also useful as evidence of your affordability.
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.
Am I eligible for a Debt Management Plan?
There isn’t exactly a criteria to be able to apply for a DMP, meaning there’s no minimum or maximum debt level needed. However, you do need to be able to afford a regular payment towards your debts, which also means that you’ll need to have a steady income.
You won’t be able to include any priority bills such as your rent, mortgage or council tax, so you also need to be sure that you’ll be able to keep on top of these during your arrangement.
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.
Is a Debt Management Plan (DMP) a good idea?
A Debt Management Plan won’t suit everyone, but if you have built up non-priority debt that you feel confident you could pay back if given enough time and reasonable monthly payments, a DMP may be a good option for you.
Whether you’re interested in a DMP or another debt solution, you should always make sure you take debt advice before agreeing to a repayment plan.
Carrington Dean is one of the Scotland’s biggest providers of debts solutions like Trust Deeds and DMPs. For more information and debt advice that can help you get your finances back on track, talk to one of our debt advisers.
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.
Content relating to Debt Management Plans is for information purposes only. Carrington Dean does not offer this solution to its clients. In any instance where a DMP is most suitable option for a customer they will be recommended to the free debt advice sector.