Debt Management Plans (DMP’s)

Once you have calculated your debt, you may want to consider a Debt Management Plan (DMP.) A DMP is a debt management solution generally used when people are struggling to meet the regular payments of their debt once all their living expenses have been taken into account. To help you decide whether you might fall into this category, have a look at the section on Priority Debts which also includes advice on how to calculate your existing debt. Generally speaking, if you have money left over each month after you have paid your priority debts but it falls short of the amount to take care of other debts such as credit cards, then a DMP may be the solution.

How Do Debt Management Plan’s Work?

A debt management plan will normally be taken care of by a debt management company. They will help you work out how much you can realistically afford to pay each month to your creditors. You then pay the debt management company and they will distribute the funds fairly between your creditors.

You should note that a particular creditor does not need to accept the proposal of a debt management plan and even if they do, it will not necessarily prevent them from taking further action against you. For example, they may still seek a County Court Judgement (CCJ) to recover the money you owe. However, a debt management plan does show your creditor that you are still willing to pay them so they my well agree that it’s the best option since they are still getting money paid back to them and it may be cheaper than taking action against you. A debt management plan is not legally binding which means from your point of view there is scope for a little flexibility. It could be that you have an unexpected bill to pay which means you’re unable to meet the commitment one month. In that case you could contact the debt management company who may be able to adjust the payment. However, as mentioned, your creditor is not legally bound to accept any proposal and may still take further action against you.

Debt Management Plans Pros and Cons

A debt management plan can be an effective way of managing your existing debt. Your debt management company will help you work out how much you can afford to pay and they ensure the relevant creditors get paid. This means you will find it easier to budget and the debt management company will communicate with the creditors involved. A creditor may also freeze interest and charges for the duration of your plan which may mean you pay off the debt quicker. They do not have to do this, but most responsible lenders will realise that adding further interest to your account will only serve to make matters worse and increase the chance they will get less money back. A  debt management plan will not suit everyone though and they are not without their drawbacks.

As a debt management plan is not legally binding, it will not stop a creditor taking further action against you and it will not prevent a negative impact on your credit score. Whilst you are making reduced payments, you are basically breaching the original credit agreement and as such, the creditor may still serve you with a Notice of Default and may still pass the debt to a collection agency. Therefore nothing within the debt management plan will prevent this and you will almost certainly struggle to get further credit in the future. If you are considering a debt management plan then it’s important to get advice first.

Debt Management Companies

There are a variety of different debt management companies to choose from but you should be aware that they are all different and many will charge fees. A fee charging company will still operate the plan in the same way but will deduct a fee for the service meaning that less money is going towards paying your debt. There are charities that offer the same service for free but if you do choose one that charges fees, be sure to check that they are regulated by the Financial Conduct Authority (FCA) first.