Of the many options for paying back your debts, the one you are most likely to hear mentioned is a Debt Management Plan, or DMP. This is an informal arrangement you set up with your creditors with the help of a debt management company. The company could be a debt charity or a private financial company. They help you to negotiate with your creditors to come to a new agreement where you pay them back less every month, but spread the payments across a longer time-frame. They also encourage your lender to freeze interest and charges on your accounts.
Many people believe that DMPs are the cheapest most effective way of paying back what you owe – and will tell you so – without giving thought to the fact that your financial circumstances may not make you a suitable candidate. Most DMP companies charge a small service fee – usually around 10% – for helping you deal with your creditors. On the surface this can seem very cheap when compared to an IVA where monthly administration fees are paid, but looks can be deceiving.
No legal protection for you
A DMP is not backed by law, only goodwill. If your creditors decide to ignore it and start charging you interest and penalties, or increase the amount they want you to pay, they can do so and you have to start the process again. In addition they can bypass your debt representative and phone you direct. Contrast this to an IVA, where you have legal protection against your creditors, where your agreement is legal and water-tight, they are made to freeze interest and penalties, and must deal with your IP not you, there’s a lot to be said for paying a little more.
Some creditors may not agree to your DMP
All debt payment plans require the agreement of your creditors, and with a DMP some may agree and some may not. You’ll be paying some according to the terms you’ve agreed to but others may refuse. If the problem is prolonged they may even attempt court action. It’s incredibly stressful. With an IVA on the other hand when 75% of the creditors by debt value agree to your proposal it is legally binding. Even if the other 25% do not agree the proposal still goes ahead.
Interest and charges may not be frozen
With a DMP any interest and charges are simply a gesture of goodwill from your creditors and they could be reinstated at any time. You will have to start negotiations again. With an IVA, it is a legal requirement that all interests and charges be frozen. It is part of the agreement.
There is no guarantee that creditors will reduce what you pay them
With a DMP you must pay off everything you owe, and there’s no guarantee that your creditors will make it easy for you. An IVA on the other hand makes sure that your creditors accept payments based only on what you can afford, and if any balance remains at the end of the term it is written off.
It will take many more years
A DMP will last as long as it takes to get all of the debt paid off. There are no short cuts or reductions in payments. IVAs on the other hand run for 60 months and that is that. Whatever debt balances are left over at the end of the term are written off.
A DMP allows you to slip up
With a DMP, you could lose heart and fall behind with your payment plan, or one big bill that you have to pay could start your creditors becoming a problem again. An IVA however is an iron-clad legal agreement that comes out of your bank account every month come hail or shine. If you have an emergency, your IP can arrange for you to take a payment break without the agreement failing or creditors getting nasty and seeking to take action.
On the face of it a DMP seems less expensive in costs and fees than an IVA, but dig a little deeper and you may find there is a bigger price to be paid than just immediate costs and fees.