All about Debt Management Plans (DMPs)
Debt Management Plans are the laid-back debt solution. They are a great way of putting you in the control of what you repay your lenders, and not the other way around. That being said, there are still some things you should know before starting.
What are Debt Management Plans?
A Debt Management Plan helps you apply the brakes, and slow down the speed in which you repay your debts. A Debt Management Company will help you to agree lower repayments based on what you can afford. They will fairly distribute your new affordable payments between your lenders. You’ll continue to pay until your debts are repaid in full.
As you’d expect, when you reduce your payments it means it will take longer to repay the debt. Although, this is a necessary evil to getting your finances under control.
Pros and cons of a DMP
How it helps
- You’ll make affordable monthly based on your income and outgoings
- Your interest and charges could be frozen if your lenders agree
- The company you use to set up your plan should deal with your lenders for you
The down side
- Lenders can still contact you for payments
- Your lenders have the option to take further legal action such as a County Court Judgement (CCJ)
- There is likely to be impact on your credit file for six years
How a DMP impacts you
Although the down sides of an DMP have just been listed above, here's just a little bit more information so you can understand this debt product in a little more detail.
It’ll take you longer to get debt free – this might be an obvious one. Paying you lenders less per month is going to increase the time it takes to get debt free. This for most people is a consequence they are willing to take in order to get their household finances under control.
Your credit rating is likely to be impacted – although the Debt Management Plan itself does not impact your credit rating, because you will be paying your lenders less than you agreed they could – and likely will – place a default notice on your credit file.
Your lenders don’t have to accept – although this is less likely, it’s still something to consider. At any point your lenders could choose not to accept your lower repayments and instead pursue for you for further legal action.
Is a DMP right for you?
There isn’t a straight forward answer to this. Anytime anyone is considering what debt solution to take, the number one priority should be which solution will get you debt free in the shortest amount of time. Ultimately your circumstances will determine if a Debt Management Plan is the right debt solution for you.
Short term fix - A Debt Management Plan can be useful when you just need a period of time paying your debts back at a lower rate. This might be due to overtime temporarily stopping, or if you will soon have a windfall which means you can repay your debts in full.
High impact on the household – When you take out a Debt Management Plan you will not be classed as being insolvent. With the other debt solutions (IVAs, Debt Relief Orders & bankruptcy) you are. There are various ways in which becoming insolvent can impact you. For example, you cannot be insolvent and hold certain jobs. If you have one of these jobs then a Debt Management Plan could be a better for you. A debt advisor will be able to help you here.
Debt free in a reasonable time - a big indicator as to whether a Debt Management Plan is the time in which you can repay your debts. If you can repay your debts in full within five years, the chances are a Debt Management Plan is for you.
Debt free in a shorter time period – it might seem obvious to say but if you can get debt free quicker with another debt solution then you should take the alternative solution.
Anyone can offer their lenders new payments, you could offer them 1p per month. What you can’t know is whether your lenders will accept your offer. They aren’t obliged to agree; however, most are willing to accept an offer when they can see you’re paying as much as you can realistically afford.
What not to do
We see so many times - people trying to get their payments as low as possible with a Debt Management Plan. We understand the want to do this. Low payments ease the strain on the household. However, what we see is people setting their repayments low even when they could afford much more.
Their payments are so low that the time scale in which they will become debt free stretches into the decades. What these people are actually doing is using a Debt Management Plan as a way to keep their lenders away, not to get debt free.
Although keeping your lenders away is a great thing the ultimate goal should always be to get debt free. That’s why we recommend you set up your payments as high as you can realistically afford. This way you’ll be debt free as quickly as you possibly can.
If while you do this and the time in which you will be debt free is still over five years, considering an alternative solution could be an option. As we’ve already said, speaking to an expert debt advisor is key to finding the right solution.