Debt Management Plans
Debt Management Plans (DMPs) are an informal solution for your unsecured debts. Unsecured debts are debts which are not attached to any of your assets, such as your car or house. This means that DMPs cannot be used for your mortgage or car loan.
A DMP allows you to renegotiate your monthly payments so that they are more manageable. Like an IVA or Trust Deed, the payments are based on how much you can realistically pay. However, as the full amount must still be repaid, smaller repayments will result in a longer repayment period, and it is unlikely that any of the debt will be written off.
It is possible to negotiate with your creditors to have your interest frozen as part of a DMP, and they can be quite flexible to suit any change in your circumstances. However, nothing is guaranteed as it is not a formal, legal solution. Your creditors are not bound by the agreement.
Like many debt solutions, a Debt Management Plan can provide you with peace of mind and the feeling of security. However, you will still be contacted by your creditors, which many find to be the most stressful aspect of being in debt.
In this guide
- Could a DMP work for you?
- How would a DMP help you?
- What are the disadvantages?
- Other Solutions
Could a DMP work for you?
To be eligible, you need:
- a relatively steady and stable income
- to be able to afford monthly contributions, even after you have paid any secured debts, and tax or rent arrears
- a relatively good relationship with your creditors. If you have regularly failed to make payments in the past, or have other issues between you, they may not agree with your proposal.
Ultimately, DMPs work best for those who are struggling, but can still afford to make reasonably sized, but smaller, regular repayments.
If you meet these criteria, you can choose to either negotiate yourself, or ask a third party, such as a debt charity, to help you. Once you have decided, there are three steps to your DMP.
Step 1: How much can you afford?
Carefully work out how much you can afford by creating a budget. Look at your documentation, such as payslips and bank statements, to get the best understanding. Your creditors may also like to see them as proof. Using this documentation, you can work out your full income and expenditure, so that you know how much monthly surplus you can offer to your creditors. Don’t forget to include non-regular payments, taxes, secured debts and tax or rent arrears.
Step 2: Show your creditors
Now, you must show your creditors what you have come up with. The more evidence you supply, the more likely they are to understand and agree. The more confidence they have in you, the better. They could even agree to freeze your interest and charges. If they reject your proposal, it may be a sign that you require an alternative, more formal solution, such as an IVA, or a Trust Deed. There is also a risk that they may lose confidence in your ability to pay, and take legal action against you.
Step 3: Stick to your agreement
Now that they’ve agreed, you simply need to keep up with your new payments. To make this as easy as possible, you need to make sure you put a lot of time, care and effort into Step 1. If you have used a third party, your payments may be made to them, and they will distribute it to your creditors. If your circumstances change, it is a good idea to communicate with your creditors as soon as possible.
How would a Debt Management Plan help you?
If you are struggling with your debts, but have a regular surplus income, a DMP could have a number of benefits for you:
- As it is not a formal solution, it doesn’t appear on any public insolvency register. This means more security for your personal data, as insolvency registers often require your name, address, occupation, and a number of other details.
- It can help you to build up a good relationship with your creditors. By demonstrating that you are actively dealing with your debts, they are more likely to trust you, and be understanding if you have any change in circumstances.
- Due to this better relationship, you are likely to have less contact with your creditors. This increases if you use a third party.
- Your quality of life is likely to be hugely improved by making your monthly payments more affordable. You are likely to feel more in control of your finances, and may even begin to be able to save a little to prepare for any future financial emergencies.
- DMPs are often considered to be a flexible debt solution. This means that, should you have a good relationship with your creditors, your arrangement can adapt to suit your needs or changing circumstances. This could allow for any temporary drops in income, or faster repayments of larger amounts, should your circumstances improve.
What are the disadvantages?
Despite these benefits, Debt Management Plans are not ideal for all situations. There are many disadvantages which can make it undesirable:
- Unlike with a Trust Deed, or an IVA, there is no set time limitations and you will not be able to write off any of your debts. This means it may take many years to pay off your debts.
- Other debt solutions will obligate your creditors to freeze your interest and fees. This isn’t the case with a DMP, so your debts can continue to grow.
- If your creditors reject your offer, they are likely to have done so because they do not believe that you can pay. If they feel this way, they may start more serious proceedings, like bankruptcy.
- Although it is possible that you will have less contact with your creditors, they can still contact you. Other solutions make it legally binding that your creditors cannot contact you.
- Some third parties charge you to organise a DMP. This can mean it will take even longer to fully repay the debts
Debt Management in Scotland takes the form of the Debt Arrangement Scheme.This is a statutory solution that offers more protection to Scottish individuals than informal debt management plans provide for all other individuals in the UK