What is a debt management plan?
A debt management plan (DMP) is an informal debt repayment plan, which can help if you are struggling with high repayment amounts to clear your unsecured debts.
The plan will involve making one affordable monthly repayment amount, which is divided between creditors to clear the full debt owed. In most cases the amount paid each month will be lower than the original amount, but over time the full amount owed will be gradually paid back.
A debt management plan is only usually recommended as a short term solution, where you debt is between £2000 and £5000. For debts £5000 and over, you should explore an IVA. An IVA is a formal solution which writes off a significant amount of your debt.
A DMP is designed to ease the mental strain of creditors chasing for outstanding payments, by creating a more affordable repayment arrangement. It will ease the financial burden and give you some breathing space thanks to the lower monthly payments.
The Best Debt Management Companies
It is completely your decision whether you pick a debt charity or a private company when you decide to take out a debt plan. Debt charities do not generally actively manage your debts, so creditor contact would still occur. With a private company, they would receive any calls/texts/emails or visits regarding your debt.
Who can debt management plans help?
The majority of people who benefit from the arrangement of a DMP owe money to more than one creditor and are struggling to meet high repayment amounts. There is no minimum or maximum amount of debt required to enter into a debt management plan.
It is a great option for those who have short term financial difficulties but have enough spare to make some repayments, once their monthly financial commitments are met. If you think it will be difficult to make repayments it may be worth considering a formal option such as an IVA.
Which debts can be paid through a debt payment plan?
Debts are divided into priority and non-priority debts, with priority debts having the most serious consequences if they remain unpaid. Priority debts include; mortgage or rent payments, utility payments, council tax arrears, maintenance payments, income tax or VAT arrears and TV licence arrears. A DMP can be arranged for unsecured (non-priority) debts such as; store cards, credit card debts, overdrafts and personal loans.
Many debt management programs do not include priority debts, which will mean these will need to be paid before an arrangement can be made. Although, there are some debt management companies which will include priority debts in your monthly DMP repayment figure. The payments you make will be used to clear any overdue priority payments first, before the payments are passed to your overdue unsecured debts.
Free debt management companies
There are a number of free debt management companies (UK) which you can consider. Please note that when you pick a free debt management company, a lot of the work has to be done by yourself. The fees within private debt management companies are due to the work that the debt management company has to conduct. A free debt management plan comes without a monthly fee, which is usually based on how much you agree to repay to your creditors.
The advantages of debt management advice
The main advantages debt companies are:
- Once a DMP is in place the creditors will probably stop contacting you.
- As an informal arrangement, there is no need to pursue formal arrangements such as an IVA or bankruptcy.
- One affordable monthly payment to your creditors.
- By arranging a repayment agreement with your creditors any potential actions against you such as County Court Judgements (CCJs) will be avoided.
- In the vast majority of cases the creditors will agree to freeze interest and remove any additional charges. Many creditors understand that their debtors face tough financial situations, so will not add more to the debt.
- Creditors tend to look favourably on DMP’s as you are showing a willingness to pay your debts in full, without the need for more formal debt management services.
- An agreed repayment arrangement may lower the monthly payment amounts.
- The arrangement is flexible, so if your financial situation changes you will be able to adjust your repayment amounts or make full and final settlements.
- There will be no requirement to sell any assets such as your home or car.
- Your details will not be published on any public records and your credit rating will not be impacted as much as filing for bankruptcy.
The disadvantages of a debt management plan
The main disadvantages which may impact you from entry into a debt management plan online are:
- Your creditors may not be willing to enter into a DMP and will pass your information to a debt collection agency instead. Although many collectors are willing to arrange a DMP as they understand the debt will be paid eventually.
- As the plan is an informal arrangement the creditors could change their mind at any time and could still contact you during the agreement.
- A creditor is still able to take further action to arrange repayment including court action and passing your details to debt collection companies.
- It could have a negative affect on your credit rating and any entries made to your credit file will stay there for 6 years.
- The monthly repayments amount may be lower, but this means the debt will take longer to clear as you are agreeing to repay the full amount owed.
- Although it is unlikely, your creditors can still contact you unlike the conditions set out in a legally binding agreement such as an IVA.
- The creditor may not agree to freeze the interest levels or additional charges for overdue payments. This could result in you paying more over the course of the arrangement.
How do debt management plans work?
In many cases a debt management company will contact your creditors, although there are some charities who will act as a third party for you. It is possible to arrange a DMP without a third party, but it will require you to speak to each of your creditors to negotiate the best possible repayment terms.
The debt management uk company or charity will assess your income and expenditure levels, to create a budget which you will realistically be able to live on. The company will consider all essential living costs such as your household bills, mortgage payments and food shopping.
At this stage it is important to include everything which you spend your money on, as it will help devise an affordable arrangement. Try to be realistic with your budget but remember to cut back on any unnecessary luxuries. If a creditor believes you could pay more than the agreed amount they could ask you to increase your payments or may even take you to court.
The debt management company will aim to create a debt management plan which involves one single monthly repayment figure, which you will be able to stick to. The debt management company will then allocate this payment to your various creditors. If your income changes at any point it is possible to increase the payments or pay the debts in full.
During the arrangement term your creditors are likely to close any lines of credit available to you such as credit cards or overdrafts. If a credit card is necessary for your employment to book essential travel arrangements, you may be permitted to retain the use of a card. Once the repayment is complete a credit provider may reinstate your account, based on your current ability to pay.
What impact do debt management plans have on credit ratings?
A DMP could have a negative impact on your credit rating, so may make it more difficult to find credit in the future. Your credit rating is used by a lender to help them decide whether you will be a risk to them of non-payment. Your credit file contains detailed information such as how you manage your bank accounts, credit commitments and any financial links to other people.
There are some creditors which ask for a note to be added to your credit file stating that a DMP is in place, which could impact your chances of arranging credit. The note will be an indication that you have suffered from financial difficulties and are at a high risk of non-repayment. Your credit file will also show that you are making reduced payments, which could make it difficult to arrange credit.
Although, if you stick to the payments agreed in a DMP it will show potential creditors that you are able to stick to a repayment plan. Ultimately, a DMP is designed to improve your long term financial situation by assisting you in arranging to repay your debts in full, which will have a very positive effect on your credit rating in the long run.
Joint debts with debt management help
A joint debt can be included within a DMP, however the creditor may still continue to chase the other debtor for repayment of the full debt, as you are both liable to repay the full amount. If both parties are struggling financially it is possible to arrange a joint DMP, which will make you equally responsible for making payments towards the plan.
How to choose a debt management company
Our best advice is to choose a debt management company which does not charge a fee. If you are already struggling financially you want to make sure that any spare income is spent on repayments, rather than a debt management companies fees. There are some providers who do not charge a fee, but they may ask for a cancellation or amendment fee.
Try to find a DMP provider which is authorised by the FCA, this information is easily available online and will give you peace of mind. An authorised company should be able to provide you with the details of all debt management options available, to ensure you find the ideal option for your financial situation.
If you are thinking about entering into a debt management plan, it is important to make sure you are aware of all the facts before making a decision. We are able to provide free advice to help you decide whether a DMP is the ideal solution, we can then help you find the ideal debt management plan, without spending anything. To find out more about the help available to you, please contact our free helpline or use our useful online debt advice tool.