Struggling to keep up with your bills and catch up on your debt, but don’t want to go through formal insolvency proceedings? Scared that if you choose bankruptcy, you could lose your assets, or that you won’t qualify for an IVA because you own a lot of equity in your home?
One possible solution is a debt management plan, or DMP. This is an informal agreement you make with your creditors to repay your debts at a monthly rate that you can afford. Unlike bankruptcy or an IVA, a DMP is not considered a form of insolvency. It is also not a legally binding contract.
How Does It Work?
To set up a DMP, you contact a debt management company which has been authorised to act by the Financial Conduct Authority (FCA). Your adviser will help you to go over your finances in detail and figure out how much you can afford to put toward our debts each month. At that point, your adviser will draft an agreement for a DMP and approach your creditors. Creditors are under no obligation to accept those terms, and may negotiate their own. Many however will agree to reasonable terms, because they want their money and know that this is your best chance to pay them back in full.
Once you have a DMP set up, you will be able to make more affordable monthly payments. Your creditors will still be able to contact you, charge you interest, and make changes to the plan. This can be inconvenient, but the flexibility in the plan may also play to your advantage if your income levels change and you need a quick adjustment. Best of all, you do not need to worry about your assets. Your home and vehicles are safe.
Do I Qualify?
One of the best things about a debt management plan is the fact that qualifying is simple. Remember, a DMP is an informal plan. You do not need to meet any strict government criteria in order to qualify—you simply need to be in an applicable situation and get your creditors to agree.
- There is no minimum debt requirement.
- You may qualify for a DMP if you own a home or vehicles.
- Your creditors must agree to the plan for it to go into effect.
This makes a DMP a great choice if you do not meet the requirements for a more formal plan or do not want to lose the equity in your property.
What Types of Debt Can You Resolve with a DMP?
A DMP is appropriate for debts such as:
- Credit card debt
- Store card debt
- Certain types of loan debt
What Types of Debt Cannot Be Included in a DMP?
You cannot include priority debts such as:
- Your mortgage
- Rent arrears
- Utility arrears
- Court fines
- Back taxes
- Maintenance payments
- Court fines
What Are the Benefits of a DMP?
- You can get a flexible debt solution set up fast.
- A DMP provides some immediate relief.
- You can get back to paying bills you can afford each month.
- Move on with your life with peace of mind while gradually catching up on your overdue bills. You may not be able to include priority household bills in your DMP, but since you will be paying less on your other overdue bills each month, you can put the leftover income toward those priority debts.
Debt Management Plan Pros and Cons
Pros of a DMP:
- A DMP is a good solution if you want to stay away from formal proceedings. If your situation does not involve a huge amount of debt, it could actually be more cost-effective and time-efficient for you to set up a DMP and sort things out informally with your creditors.
- Even though your creditors are not required to freeze interest and penalties, many will be open to doing so informally on your behalf.
- Many creditors will be content to negotiate directly with your adviser instead of calling you. That means a lot less pressure on a day-to-day basis.
- You pay only what you can afford and you do not need to touch the equity in your assets. A DMP does not have a time limit; it can last as long as you need it to.
- You can use a DMP if you do not qualify for another debt solution.
- A DMP is flexible and may be easily revise if there are changes in your income. In fact, you should be reviewing your DMP on an annual basis with your debt management adviser.
Cons of a DMP:
- You do need to pay back most or all of your debts in full with a DMP. Some debts may be discharged, but this is not an insolvency plan. If you are looking for a plan that will discharge your debts, check into an IVA or bankruptcy.
- Even though many creditors may agree not to contact you, some may continue to call you and mail you.
- Not all creditors will agree to freeze interest and fees. Even if they do, they may begin charging either again at the drop of a hat.
- Many types of debt cannot be included in a DMP.
- With a DMP, there is nothing to prevent your creditors from demanding payment in full at a later time or taking legal action against you.
How to Apply for a DMP
How do you set up a DMP? Here is a quick step-by-step guide which you can follow to get started.
- Begin by getting in contact with a debt management company which has been authorised to act by the FCA.
- Once you have set up an appointment, your adviser will review your financial situation with you in depth. After reviewing your financial situation you will need to gather documents to prove your income, assets, bills, and debts, as well as contact information for your creditors. Your adviser will explain to you what is required.
- Your adviser will draw up a monthly budget and figure out how much money you can afford to put toward your debts.
- The adviser will propose a plan to you and your creditors. Your creditors may accept or reject the plan.
What Happens Next?
If some or all of your creditors agree to the DMP, those debts will be consolidated into a lump sum monthly payment which you will make to your debt management company. The company will then distribute the funds amongst your creditors. Some companies may also offer you the option of “including” your priority debts. Note that your priority debts cannot actually be incorporated into your DMP, but the company may be willing to collect and distribute the full monthly payments you make on those bills. This is simply done as a convenience to you.
Depending on how accommodating your creditors are, some of the may be willing to discharge certain debts, freeze credit, and stop penalties and fees during the DMP. While some may continue contacting you, you can expect a reduction in contact overall. You will be dealing mainly with your debt management company from here on out.
Once a year or so—more frequently if necessary—you will sit down with your adviser and review your plan to make sure that the amounts you are paying are still working for you and your creditors based on your income. If your income goes up, your creditors may demand you pay more. If it goes down, you may be able to negotiate further reductions in your monthly dues.
Frequently Asked Questions
Q: Will a DMP hurt my credit rating?
A: A DMP may temporarily damage credit, but consider how much damage your late payments are already doing to your score. Since a DMP helps you get back on track, in the long run, it may lead to a gradual recovery of your credit score.
Q: What does a DMP cost?
A: Some companies charge fees for administrating a DMP while others do not. Always ask about all hidden costs before committing to using a company’s services.
Q: How many accounts can I include in a DMP?
A: You can include as many as you want. If the creditor agrees, it can be incorporate into your plan.
Q: Are there other options for paying back my debts?
A: Absolutely. In fact, for many customers, an individual voluntary arrangement (IVA), bankruptcy, or other formal scheme may actually be a better choice for discharging, reducing, and consolidating debt.
If you think a DMP may be the right solution for you, or if you would like to ask us more questions, you can contact us directly at 0203 326 9000. We are authorised by the Financial Conduct Authority (FCA) to act on your behalf and negotiate with your creditors. We can also help you figure out whether you might qualify for another debt solution such as an IVA which could help you to escape the cycle of debt even faster. Our goal is simple—to help you get back on your feet and living your life!