A debt management plan, or DMP is a plan where you pay back your debts in smaller, more manageable monthly amounts with the help of a company or charity.
The company or charity, known as a DMP provider or plan manager, works to help you deal with your debt, communicating and negotiating with your creditors to reorganise repayment in a fair fashion to all parties.
These plans are voluntary, and are not legally binding, but can help you or a family member recover from some kinds of debt.
In this article, we will explain how debt management plans work, who provides them, how to arrange them, and what kind of debts and individuals they can work for.
How does a Debt Management Plan work?
If you are struggling with debt management, you can enlist the help of a debt management provider such as nonprofit credit counselling agencies or for-profit debt management companies.
One of the keyways they can help is by organising something called a debt management plan. This plan, which is not legally binding, organises how much you should pay every month and how that money should be divided between your creditors.
When an organisation agrees to create a debt management plan, they will first talk to you to find out how much you can realistically afford to pay towards your debts after covering your essential living costs.
After doing this, they talk to your creditors, attempting to arrange a plan to pay back your debts over a longer period, paying a smaller, more manageable chunk of it each month.
A counsellor from the debt management provider is likely to also attempt to negotiate the interest or fees you must pay on your debt. By explaining your financial situation to your creditors, a debt management organisation can sometimes convince them that offering you a lower interest rate is the only way they will ever feasibly get their money back.
Rather than paying your creditors directly, when you have a debt management plan you pay your debt management company once a month, and they pay your creditors. By sticking to the terms of the plan, over time, you can pay off your creditors.
What kind of debts do Debt Management Plans work for?
Debt management plans are unsuitable for priority and secured debts and are designed to manage unsecured non-priority debts.
Let’s examine what the different types of debt are in more detail.
Priority debts
Priority debts are of utmost importance as they carry immediate serious consequences. These include debts that could lead to eviction, such as mortgage and rent arrears where you will want to know how to stop a repossession of your property. Others include quickly collectable debts like council tax arrears, and utility bills and arrears that could result in service disconnection.
Secured debts
Secured debts are linked to assets or items bought on finance including cars, furniture, and electronics, as well as mortgage debts. The exclusion of secured debts from debt management plans arises from the legal rights of creditors to reclaim the asset should the debt remain unpaid.
When arranging a debt management plan, you should make all your priority and secured debts known to your plan manager. They will then structure your plan to ensure that you can pay your non-priority debts at a rate which is affordable after covering your priority debts.
Non-priority unsecured debts
Non-priority unsecured debts, which debt management plans are designed to manage, are debts which are not associated with any particular asset, and where non-payment does not have serious immediate consequences. These can include credit card debt, overdrafts, payday and personal loans, and debts on store cards.
Another type of non-priority debt is money owed to friends and family. This can be included in a debt management plan, provided it is formalised through a written agreement, but the informal nature of such debts often poses a challenge.
While non-payment of non-priority unsecured debts may eventually escalate to visits by debt collectors and, in the long term, could result in court proceedings, the repercussions are less severe compared to the immediate consequences associated with the non-payment of priority debts.
Other debts
There are a few other types of debts which are not normally included in debt management plans, such as student loans, court-ordered fines, and child support payments.
These debts are excluded as they are often governed by different regulatory frameworks and have specific collection processes that do not align with the structure of a debt management plan.
Is a Debt Management Plan a good idea for you?
Debt management plans (DMPs) in the UK offer a structured pathway to repayment if you are struggling with unsecured non-priority debts.
By consolidating various debts into one manageable monthly payment, a DMP can provide you with real financial relief. However, whether a DMP is the right choice for you hinges on several factors.
Let’s look at these.
1. What is your financial situation?
Firstly, you need to assess your financial situation.
Debt management plans are ideal if you have a regular income but are struggling to meet your monthly unsecured non-priority debt obligations.
By arranging a plan, you can reduce all the costs down to one simple payment charged monthly on the day of your choosing, dramatically reducing the harm you can do to your finances.
Debt management plan providers can also help reduce your monthly debt bill by negotiating with your lenders.
If you are struggling to afford to pay your priority debts, a debt management plan is unlikely to be able to help you much, and you should think about choosing a different debt management strategy.
2. How fast do you want to repay your debt?
Debt management plans are often not the fastest way to pay off a debt.
By reducing the amount which you pay your creditors each month, you are likely to extend your repayment period and, in some cases, quite dramatically.
This can harm financial goals and lead to you being in debt for a long time.
3. Are you willing to accept the cost implications?
While a debt management plan can substantially reduce the amount you pay monthly for your debt, over the extended repayment period you will often end up paying back a larger total sum than you would otherwise.
In addition, some private debt management companies charge for their services. These bills can add up, leaving you paying yet more of your income towards debt repayment.
4. Can you deal with the credit implications?
Entering a DMP can adversely affect your credit rating. While it is a step towards financial stability, the note of being on a DMP may stay on your credit file for some time, potentially making future borrowing more difficult and expensive.
How do you put a Debt Management Plan in place?
There is a long list of debt management plan providers in the UK, including both private companies and charities.
If you decide that a debt management plan is the right approach for you, you should begin to research these providers and figure out which one suits you.
There are a lot of options and choosing the one which fits you best can make a big difference to your situation.
Once you have chosen a plan you should contact the provider in question. They will ask you for details of your income, debts, and expenses, and help discuss a suitable plan for you.
Should you pay for a Debt Management Plan?
While many debt management plans in the UK are free, some companies charge a fee for providing and organising them.
These providers claim that since you are paying for their services, they work on your behalf, whereas free charitable organisations are funded by subsidies from banks and credit card companies.
They argue that this makes them more motivated to provide you a great service and negotiate a good result, reducing your payments and possible interest rates.
While this may be true, Citizens Advice warns to be very careful when employing a fee charging provider. Ensure they are authorised by the FCA (Financial Conduct Authority) and consider choosing one who has signed up with the Debt Managers Standards Association (DEMSA), a professional association that operates under a code of practice approved by trading standards.
Before you choose a provider, you should check how much they are charging in fees relative to the amount they are paying back to your creditors. You should also ask how long the plan will take to pay back your debts.
It is often the case that the lower monthly repayment made on a paid plan leads to a longer repayment period and a higher total payback amount than the equivalent free plan, as the money spent on fees allows the interest more time to accumulate.
Who are the main providers of Debt Management Plans?
The main providers of debt management plans (DMPs) in the UK are predominantly charitable organisations that offer these services for free to help you manage your debts effectively. Here are some of the primary charitable organisations providing DMPs:
1. StepChange
StepChange is a charity dedicated to offering free debt advice and DMP services. It has garnered a reputation for transparency, honesty, and positive customer reviews, making it a trusted choice for individuals seeking debt management assistance. Learn More.
2. National Debtline
Operated by the Money Advice Trust, National Debtline provides free debt advice and DMP services. It extends its services to individuals whose budgets meet certain eligibility criteria, ensuring those in need receive the necessary support to manage their debts. Learn More.
3. PayPlan
As one of the UK’s largest providers of free debt management services, PayPlan offers a variety of debt solutions, including DMPs. It strives to provide comprehensive support to individuals, aiding them in navigating their financial challenges and working towards debt resolution. Learn More.
These charitable organisations are committed to providing free, reliable, and effective debt management services across the UK. Through their support, many individuals are able to regain control of their finances without the burden of additional fees associated with paid DMP services.
What are your other options?
Debt management plans (DMPs) are a viable solution for managing and repaying debts over a period of time.
However, they are not the only option available if you are facing financial difficulties. It is important to explore alternative solutions that may better suit your circumstances.
Here are some notable alternatives to DMPs:
- Individual Voluntary Arrangements (IVAs): An IVA is a formal and legally binding agreement between you and your creditors to pay back your debts at a certain rate over a specified period. They can provide debt relief by freezing interest and charges and often result in a portion of the debt being written off.
- Debt Relief Orders (DROs): If you have a low income, minimal assets, and debt under £20,000, a Debt Relief Order may be a suitable option. DROs freeze your debts for a year, during which you are not required to make payments, and if your financial situation has not improved by then, the debts included in the DRO will be written off.
- Bankruptcy: Bankruptcy is a form of insolvency that clears most debts if you simply cannot afford to pay them. It is a serious step that can have a huge impact your ability to obtain credit in the future. However, bankruptcy can provide a fresh start if other debt solutions are unattainable.
- Debt Consolidation Loans: Consolidating multiple debts into a single loan with a lower interest rate can make debt management more straightforward. It is vital to ensure the loan is affordable and will not extend the debt period significantly.
- Informal Negotiations: Sometimes, negotiating directly with creditors to freeze interest or agree on a repayment schedule can be an effective way to manage debts without entering into a formal arrangement.
- Credit Counselling: Engaging with credit counselling services can provide valuable insights into managing your finances and identifying suitable debt solutions.
- Selling Property: If you own property, selling it could provide the funds needed to clear your debts.
Each of these alternatives has its own set of advantages and disadvantages.
It is advisable to seek professional financial advice to understand the implications of each option and to choose a debt solution that aligns with your financial goals and circumstances.
In Summary
A debt management plan is a voluntary agreement whereby you pay a provider a certain amount of money each month, and they split it up to pass onto your creditors.
Debt management plans can have the advantages of reducing the amount you need to pay each month through negotiation and offering an intermediary to deal with your creditors. However, due to the slowed repayment schedule, they usually come with the downside of it taking longer to pay off your debt.
Note that however, these plans only work for certain types of debt, known as unsecured nonpriority debts. These are the debts for which nonpayment does not have immediate serious consequences such as eviction or utilities being cut off and are not secured against anything that can be repossessed.
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