A Debt Management Plan (DMP) is an informal solution to your debt problem that allows you to repay your creditors at a reduced monthly rate that you can afford. It’s not a great solution as paying the debt can take years longer and your creditors can alter the agreement you make with them at any time. You could use this solution if your debt is very low and you have a temporary income problem. It might be useful as a short term solution before you declare bankruptcy or get an IVA or even perhaps as a bridge before you come into that big windfall!
People in Scotland can avail of the “Debt Arrangement Scheme” which is a free DMP that protects you from creditors.
The disadvantages of a Debt Management Plan are:
- You still have to pay back all the debt you owe.
- In many cases the DMP lasts for a very long time.
- The bank is not obliged to freeze interest and charges.
- A debt repayment plan can only cover your unsecured debts and arrears
- The agreement is informal (i.e. not legally binding) so even if you do get the bank to agree to reduced interest rates and to freeze interest and charges, they could alter the agreement at any time.
- Many people end up using a private debt management company to arrange the DMP. If you are already in one of these get out of it fast and move to one of the free providers. These companies can take a substantial cut from you every month – money which should be paying off your debts. Usually the fee structure consists of an initial setup fee and a percentage of the payments (up to 17.5%) that you make each month. Avoid these companies like the plague (see the article Where to get the Best Debt Advice for the charities that provide free DMPs).
- As you will not be making repayments on your unsecured debts, your credit rating will be adversely affected if you do a Debt Management Plan.
- Your creditors will continue to take action to recover your debts (including possibly court action) and may continue to send angry letters months into a debt management plan.
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There are some advantages to the Debt Management Plan:
- Allows you to make reduced payments to your creditors.
- Allows you to combine everything into one single affordable monthly payment
- Your creditors might agree to reduce some fees, interest and charges. It is worthwhile asking them to do so.
- The Debt Management Plan disciplines you to pay the debt back.
- You don’t have to pay to set up a DMP even though many people do. You can negotiate a plan with your creditors yourself. Or, you could use a non profit organization that sets up Debt Management Plans for free. See the “Best Debt Advice” companies table for more information.
- As your details are not publicised (such as occurs in bankruptcy) there is no social stigma attached to this solution.
- It can be a good interim solution, if you know that your financial situation will improve dramatically soon.
Obviously you can’t go ahead with this solution if you don’t have any surplus income. Even if you do, remember creditors do not have to accept any offer of repayment below the contracted minimum. Also even if you do have some excess income each month, it may take you so long to pay off the debts that it is not worth doing.
Private debt management companies, whose goal is to sell you an IVA will over emphasize the negative aspects of the Debt Management Plan and focus on the time it will take you to pay back the debt. They will typically say something like:
“Paying the minimum payment of £200 per month using a Debt Management Plan will take you 12 years six months to clear your debt of £50,000 not including interest and charges”. Do not be frightened of such talk if you think a DMP would be a good interim solution for your debt problem.