Before applying for a Debt Management Plan (DMP), it’s crucial that you know exactly what kind of arrangement you’re signing up for. Despite being an informal repayment plan, a DMP can still affect various aspects of your financial situation, including your credit rating.
For example, while it might help you streamline the repayment process, it will be listed on your credit file for up to six years.
How much debt do you have?
How does a Debt Management Plan work?
A Debt Management Plan (DMP) is an informal agreement between you and your creditors to repay your unaffordable debt in one monthly payment until it’s fully repaid. It’s overseen by a credit counseling agency and might be the right solution for you if you don’t want to default on the debt but you’re struggling to make your repayments as originally agreed.
DMPs can be used to deal with most unsecured loans and non-priority debts, which are debts where the creditor has limited power to take action. Examples of non-priority debts include credit card accounts, benefits overpayments, water bills, overdrafts, store cards, and personal or payday loans.
This means that, any priority debts you have, such as council tax, rent or mortgage arrears, and court fines, can’t be included in your DMP and must be dealt with outside of your arrangement.
When you apply for a DMP, the provider will work with you to review your monthly income and determine how much you can realistically afford to repay each month. They will then contact your creditors to set up your arrangement and distribute your payments among them.
DMPs are unique in that they can be arranged yourself or by a debt management company. It’s almost always recommended to use a DMP provider, as this removes the need to manage your own DMP payments and communicate with your creditors yourself.
Some providers charge a fee to administr a DMP, but there are several free providers that can help you set up a DMP free of charge.
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What are the pros and cons of Debt Management Plan?
It’s crucial that you’re familiar with the pros and cons of a DMP before deciding to use it to deal with your unaffordable debt.
Pros
You could negotiate lower interest rates
One of the main advantages of a DMP is the option to potentially lower or freeze interest and charges on the included debts. This isn’t a guarantee, however, and is dependent on each creditor, so you’ll need to propose this to your creditors when you apply.
Usually, creditors will agree to pause any further fees in exchange for you agreeing to make regular payments towards the debt. Most creditors will also recognise that high interest rates will only put you in a situation where you’re unable to pay anything towards the debt, which also causes them to lose out.
They are more flexible than other debt solutions
DMPs are tailored to your unique financial situation and budget by letting you repay what you can afford over a fixed period. This means that, after your essential living costs, the remaining disposable income will be used to pay your debts. You can even get a joint DMP to combine your and your partner’s debts.
Most providers will also be happy to adjust your DMP to suit your fluctuating circumstances and because you’re not legally tied into the agreement, you can leave at any time if you find it’s no longer working for you. However, you must inform your DMP provider of any extenuating circumstances as soon as possible as missing payments can lead to your arrangement being cancelled.
There are fewer restrictions
Unlike formal and legally binding debt solutions, like Individual Voluntary Arrangements (IVAs), there are no formal restrictions placed on you with a DMP. This means that you don’t have to worry about any knock-on effect it could have on your assets, job, or home.
However, this also means that you won’t be legally protected from further enforcement action and your creditors could still choose to recover the debt if they wish.
The impact on your credit score is smaller
Unlike other debt solutions, a DMP won’t usually be listed as a single entry on your credit record. Instead, the individual debts included in the DMP will be listed for six years and a marker might be added to let lenders know that you’re repaying your debt using a DMP.
Once six years have passed and any evidence of the debts has been automatically removed from your credit file, you’ll be free to rebuild your credit score.
You’ll repay 100% of your debt
Unlike other debt solutions where you only repay a portion of the debt and the rest is written off, a DMP allows you to repay all of your debt at a pace that’s more manageable for you.
Some people also prefer a DMP as it means they pay 100% of their debt and there’s no chance that they’ll be chased for the remainder of the balance after they exit the arrangement.
“No fuss, just simple, honest advice. Communication is good and they make the process as easy as they can.”
Cons
Not all creditors will agree
Although most creditors will be happy to participate in a DMP if it means they will receive 100% of the debt they are owed, this isn’t always the case for all of your creditors.
The DMP provider will negotiate with the people you owe to secure the best terms, but the final decision is ultimately up to your creditors.
It isn’t legally binding
Perhaps the biggest drawback of a DMP in comparison to other debt solutions is that it doesn’t provide legal protection. This means that your creditors aren’t legally required to honour the agreement and can decide to contact you, add interest, or pursue legal action at any point during your arrangement if they wish, which can lead to you accumulating more debt.
However, entering into a DMP removes the need for an Insolvency Practitioner (IP) and shows that you are committed to dealing with your debts head-on, which might encourage creditors not to pursue any further action while you’re actively making debt payments.
It can take several years to complete
As you’ll be required to pay back your debt in full, how long it takes to complete the DMP depends on your debt level. If it’s significantly high, you could end up spending more money in the long run. Some debt solutions, such as a Debt Relief Order (DRO), for example, only take 12 months to complete.
Usually, if your debt level means that it would take you over a decade to repay your debt under a DMP, a credit counselor will recommend another debt solution.
Certain debts can’t be included
A DMP can only be used to deal with non-priority debts, so more serious debts, such as council tax, utility bills, child support arrears, and rent or mortgage arrears, must be dealt with outside of your arrangement.
Put simply, if the majority of your debts are priority debts, another debt solution would probably be better suited to your circumstances.
Your credit score will be affected
If you’re wondering: Will a DMP affect my credit score? The answer is yes. As previously mentioned, a DMP won’t be listed separately on your credit report, but the individual debts will. This won’t have as much of an impact as it would have had the DMP itself been listed as a standalone entry, but it will still negatively affect your credit score because you’ll be making repayments at a lower rate than what was originally agreed.
However, it’s worth noting that every debt solution will temporarily harm your credit score in one way or another.
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Conclusion
A Debt Management Plan (DMP) is an informal agreement between you and the people you owe money to to repay your debt in full over a set period. Like all debt solutions, there are various pros and cons you should be aware of before you make a final decision.
For example, while a DMP tends to be more flexible than other debt solutions, it can take up to 15 years to complete. It can, however, be exited at any point if it’s no longer working for you as you’re not legally bound to the terms of the arrangement.
If you’re considering a DMP to help you deal with your unaffordable debt, don’t hesitate to reach out to a credit counselor for free advice and support. They will review your financial situation and determine whether a DMP would be the right solution for you.
