If you’re struggling with debt and looking for ways to get back in control of your finances, you might have heard a little about Debt Management Plans – or ‘DMPs’ for short.

A DMP will allow you to pay just one affordable monthly amount to gradually pay off everything debt you owe. It might take you longer than it would using an Individual Voluntary Arrangement (IVA) or Trust Deed – but a DMP can be a good option if you can afford a smaller amount over a longer period of time.

Make sure to familiarize yourself with the main differences between Individual Voluntary Arrangement (IVA) and Debt Management Plan to ensure you choose the option that is right for you.

Here, we’ll take a detailed look at what a DMP is – so you can decide if it’s the right solution to help you get on top of your debts.

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What is a Debt Management Plan (DMP)?

A Debt Management Plan is an informal debt solution. It’s referred to as ‘informal’ because it is not legally binding and isn’t enforced by the court.

Instead, a DMP is an agreement between you and the companies or people you owe money to (your ‘creditors’). You agree to pay a certain amount each month – and they agree to accept this amount and stop chasing you for the full amount or any missed payments. Some creditors may even agree to freeze any interest or late fees too.

You can set a DMP up yourself – or you can have a third party debt management company negotiate a DMP for you.

A Debt Management Plan involves a lot of organisation and lengthy discussions with each of your creditors. Because of this, people often prefer that a DMP provider does this work on their behalf – but they do charge for this service; so it’s useful to know what’s involved. Some debt charities may offer to help you set up a DMP free of charge.

How does a Debt Management Plan (DMP) work?

Since a DMP isn’t a legally-binding process, exactly how it works will vary a little from company to company – but the basics are usually very similar. This is how to get a DMP:

  1. Choose a DMP provider

You can set up your Debt Management Plan yourself – but if you would like a little support, you can choose a third-party company to help. You may even find some debt charities with offer DMP services free of charge.

If you decide to work with a DMP provider, they’ll talk to your creditors (banks, loan companies, credit card companies, etc.) on your behalf – so it can be a good stress-free option. You’ll also just have to make one payment to them – rather than lots of small amounts to each of your creditors.

DMP companies are authorised and regulated by the Financial Conduct Authority – so you’re in safe hands if you decide to work with one. They’ll usually have debt advisers who can offer debt help and debt advice to people – so there’s a chance to have a chat about your situation before you commit.

  1. Work out affordable monthly payments

Now it’s time to work out exactly what you can afford to repay.

Your DMP provider will be able to help with this – but you’ll need to provide them with pay slips, bank statements, bills, self-employed income details and other relevant financial paperwork so they can suggest a repayment amount. You’ll also need to provide information about all of your debts – loans, credit cards, credit debts, etc.

Your creditors will want as much paying back as possible – but they will understand that you’ve got to keep enough back to cover your cost of living and essentials.

  1. Contact your creditors with a proposal

When you’ve got your monthly budget worked out, it’s time to contact each of your creditors with an amount you can afford to repay.

Some of the companies you’re dealing with will offer goodwill gestures to help. For example, freezing interest on a credit card, stopping any additional charges on a loan – and so on.

They are not obliged to agree though – so if they don’t, you might find you need to explore more formal debt solutions.

  1. Start your payment plan

After making your proposal, you should begin making your monthly payments – even if some of the companies you owe haven’t yet agreed.

The idea is – it’s always better to be paying something, rather than completely missing payments. You may have to review this amount if they reject your proposal – but if they agree, they’ll confirm everything in writing.

Is a Debt Management Plan (DMP) the same as Debt Consolidation

We’re often asked if a Debt Management Plan is the same as a debt consolidation loan – but it’s not.

Debt consolidation usually involves taking a loan which you then use to pay off a number of smaller debts – like credit cards and payday loans. By doing this, you could potentially pay a lower the amount you’re paying off each month – but you will pay interest on the overall loan.

A debt management plan is usually a better way to get help with debt – as it doesn’t involve taking any additional credit – and therefore, you won’t have to pay additional interest.

How long does a Debt Management Plan (DMP) take to set up?

Usually, DMPs can be set up quite quickly – so you also get debt relief quite quickly too.

The longest part of the process is normally working out what you can afford to pay so you can put forward a repayment plan for your creditors.

When you have this information worked out, you don’t actually have to wait for the companies to agree – it’s usually considered to be a positive step that you’re just making some kind of regular payment.

When your creditors do review the proposal you’ve sent, they will then officially update their systems to reflect your new monthly payments and confirm all the details in writing.

Which debts can be included in a Debt Management Plan (DMP)?

A Debt Management Plan is designed to help you deal with non-priority debts. Therefore, the types of unsecured debts suitable for a DMP usually include:

  • Credit cards and credit card debt
  • Personal loans
  • Overdrafts
  • Payday loans
  • Store cards
  • Money owed to friends or family

Which debts cannot be included in a Debt Management Plan (DMP)?

Some types of debt are considered to be ‘priority debts’ or ‘secured debts’ and are usually not suitable for a Debt Management Plan. These include:

  • Council tax debt
  • Mortgage payments
  • Rent
  • Vehicle PCP (personal contract purchase) agreements
  • Income tax debts
  • National insurance debts
  • Court fines
  • Hire purchase (HP) agreements for essential items
  • Child support or child maintenance debts
  • TV licence debt
  • On-going utility bill payments

Does a Debt Management Plan (DMP) affect your credit score

A Debt Management Plan will almost certainly damage your credit score – because it usually involves breaking the original credit agreement you signed when you took the debt on.

Since you’ll be paying less than the amount you agreed to, you’re effectively letting the credit agreement slip into arrears – and the lender will log this with credit referencing agencies.

However, setting up and sticking to a DMP is likely to have less of an impact on your credit score than continuing to miss payments and risk court action – so it will help you get on top of your debts sooner. After six years, any missed payments, court action, or defaults will automatically be removed from your credit file.

What are the advantages and disadvantages of a Debt Management Plan (DMP)?

Like other debt solutions, Debt Management Plans have pros and cons. We’ve recapped them all here – so you can decide whether or not you’d like to explore a DMP in more detail.

Advantages of using a Debt Management Plan

  • You only have to make one monthly payment, and it will never be more than you can afford to pay back
  • You’ll only have to make a single monthly payment, rather than managing lots of individual payments to your creditors
  • You can use the DMP to get your household bills back up to date so you can make your normal on-going payments
  • None of your debt will be written off – which means creditors will look at this kind of arrangement more favourably
  • A DMP can be adjusted to account for changes in your circumstances

Disadvantages of using a Debt Management Plan

  • Your creditors might not agree to the plan and could still take further action against you – including a County Court Judgement (CCJ)
  • Some DMP providers charge fees for the service – which could add to what you owe
  • A DMP is based on goodwill, so your creditors may still contact you in an effort to get you to pay more
  • Most creditors will normally freeze interest and charges – but they don’t have to. If they don’t, this could increase the amount you owe
  • Reducing your payments will mean that your debt is stretched over a longer period – which could have longer-term effects on your credit rating
  • You can only include non-priority debts – so you may need another debt solution if you have priority debts