Debt Management Plans (DMPs) are much in the news these days. Some negative aspects of the industry made the biggest headlines. Like any industry a few bad apples can give the barrel a bad name. In the UK the Office of Fair Trading (OFT) has already taken steps to deal with the bad apples. The most serious offences it has identified occurred in the areas of marketing and charging practices. In September 2010 it issued a warning to 129 debt management companies and followed that up with high profile enforcement action against the worst offenders.
The OFT intends to publish revised debt management guidance in June 2011. It is not clear at this point whether the government plans to introduce any legislation to regulate DMPs. However The Ministry of Justice has issued a consultation document on the future of DMPs. Three options for regulation are being suggested. These are to marginally enhance regulation by the OFT, to introduce industry self regulation with voluntary codes of practice and/or to create a new solution i.e. a statutory DMP. Since the DMP is the dominant personal insolvency solution in the UK at present, it is puzzling that the government seems to shrink from the responsibility of legislating in this area. So what is the current status of national debt management and how does it bring relief to debtors?
A DMP is an informal flexible approach to resolving a personal debt problem whereby creditors are repaid in full over a period of time. The rate at which creditors are paid is based on what the debtor can afford and thus a DMP can last for a long time. You can administer your own DMP by dealing directly with your creditors. These self administered DMPs are sometimes called SA DMPs or DIY DMPs. However, most people who enter a DMP do so with third party assistance, and use the services of a commercial debt management company or one of a variety of charitable organisations. These include the CCCS and Payplan and indeed the CAB who can provide invaluable free advice and assistance.
Why should the financially troubled debtor use a third party service provider to help set up a DMP with creditors? There are two main reasons for this. Firstly, debtors are often uncomfortable in trying to deal with their creditors directly. Secondly, creditors themselves often prefer to deal with a service provider who understands the need for efficiency and proper structures in managing a DMP without the (understandable) emotion and personal upset that dealing directly with a distressed debtor may involve. The knowledge and experience built up by service providers, in dealing with creditors over many years, offers debtors a degree of assurance and confidence that their DMP will be managed smoothly and with the minimum of hassle and unwanted communications from creditors.
Can you obtain new credit while in a DMP? Because it is an informal process, you cannot be prevented from obtaining further credit while in a DMP. However, it is against the spirit of the plan that you should do this and creditors who may have agreed to your DMP in the first place may and probably will certainly reject it if they learn that you have broken the spirit of the agreement in this way. This is because you made a commitment to use all of your disposable income to repaying your existing debts when you entered the DMP.
What debts are covered by a DMP? All unsecured debts such as loans, credit cards, store cards and bank overdrafts are covered. Your secured debts such as your mortgage or HP agreements are prioritized in your income and expenditure calculations, so that you do not fall behind on these payments.
What are the advantages of a DMP? Creditors generally prefer debt management to other processes for resolving financial difficulties because in due course you will repay all of your debts. From the debtor’s point of view, you do not have to release equity from property, you only pay what you can afford, your DMP is designed to suit your personal circumstances and needs and your details will not be put on the Insolvency Register.
How much does a DMP cost? It depends on who you use since debt management fees vary from one provider to the next. It may pay to shop around before you select your provider. Most DMP service providers charge a set up fee equal to the debtor’s first monthly payment into the DMP. This means that creditors receive nothing during the first month the DMP is running. Thereafter, charges are usually a fixed percentage of the monthly payment made by the debtor. The average monthly charge is 15% with a minimum of around £25 and a maximum of around £100. As you shop around, you will find that charges vary. For example, if you enter a DMP and agree to make monthly payments of £300, your DMP provider retains the first payment of £300 in respect of set up fees and thereafter it charges £45 per month. It distributes the remaining £255 to your creditors on a pro-rata basis.
What is the effect of entering a DMP on the debtor’s credit rating? The truth is that the credit rating may already be affected if the debtor has arrears of payments or a history of missed payments or late payments. The debt management provider negotiates reduced monthly payments to creditors, and so the original contracts will be broken. Defaults are likely to be recorded on the debtor’s credit file and credit reference agencies retain such records for at least six years.
Does a debtor have to be insolvent to enter a DMP? No, it is not a prerequisite to be insolvent. It may be that the debtor’s income combined with any assets they may have is sufficient to pay off all debts in full in accordance with the terms under which the funds were borrowed. However, the debtor might be unwilling to carry out some unpalatable things to pay off the debts. For example, there might be sufficient equity in the debtor’s property to pay off the debts when combined with the debtor’s income. This might entail selling the family home to release the equity if the debtor cannot obtain a remortgage or if the terms of a sub-prime remortgage are prohibitive. A DMP might provide a means of postponing the sale of the family home or giving the debtor some relief until such time as a remortgage can be negotiated on reasonable terms.
Will creditors accept the debtor’s offer of payment in a DMP? There are many DMP service providers who long experience of negotiating with creditors and who have a track record of getting offers accepted. However, creditors do not have to accept reduced payments or freeze interest and charges and there is no guarantee that any existing or threatened legal action or proceeding will be suspended or withdrawn. Furthermore, any debt collection cost incurred by a creditor is normally be added to the debt. The DMP provider keeps the debtor informed regarding the status and progress of negotiations on reduced payments.
Does a debtor have to be employed to enter a DMP? No, but it is necessary to have a source of income that is greater than what is required for living expenses. Most people who enter a DMP are employed. However, people who have recently become unemployed and who are actively seeking employment can consider offering their creditors a short term DMP, particularly when they have good prospects of securing employment with a reasonable level of disposable income. While people whose entire income is comprised of benefits can offer a DMP to their creditors, the level of disposable income is likely to be low and it may well be that an alternative solution such as bankruptcy or perhaps a Debt Relief Order might be a more suitable and appropriate solution.
Are employers informed about their employee entering a DMP? Reputable DMP providers offer complete confidentiality and privacy in relation to the financial affairs of debtors. No information about the debtor is disclosed to any outside organizations including the debtor’s employer. Particular care is taken when making contact with the debtor to ensure that others will not learn of the debtor’s circumstances. Obviously the debtor needs to behave discreetly in communications with creditors and with any third party advisors to ensure that the DMP is not inadvertently disclosed to the employer.
How long does a DMP last? That really depends on the debtor’s personal circumstances. However, the DMP provider should be able to estimate how long the plan is likely to last, once it has received all of the debtor’s personal information and in particular the amount of the debts and the debtor’s disposable income. Since all of the debts are to be paid off in full, the term of the DMP could be quite long.
Does the debtor need to open a new bank account when entering a DMP? Yes, almost certainly. Most people nowadays have their wages/salary/benefits paid into a bank or building society with which they also have debts – such as an overdraft, credit card or loan. This can be quite messy when the DMP commences, since the existing bank or building society may seek to use all of the debtor’s wages/salary/benefits to address the deficits in the debtor’s accounts with them, to the disadvantage of the debtor’s other creditors. So, it is best to open a new bank account with a bank or building society that is not connected to your existing bank. The debtor needs to ensure that wages/salary/benefits are paid into the new account and that priority payments (mortgage, rent, council tax, car HP etc) are made from the new account also. Any direct debits with the debtor’s existing bank need to be cancelled in writing and relevant creditors informed. These steps should ensure that the debtor remains in control of his or her income and that all creditors are treated equally and on a fair and equitable basis.
What happens if the debtor’s circumstances change while in a DMP? Because a DMP is flexible and informal, it is not as rigid as other processes. The DMP provider will usually have assigned a contact or liaison officer with specific responsibility for the debtor’s DMP. The debtor should know who that contact person is and keep them fully aware of their circumstances at all times, particularly in relation to any direct correspondence or contact from creditors or any changes to income and expenditure. The DMP provider should then contact creditors and communicate any issues that arise from such changed circumstances and propose solutions that satisfy the debtor and creditors.
What are the alternatives to a DMP? There are many alternative courses of action open to anyone in financial difficulty who is seeking relief. The debtor should be aware of all available options before deciding which way to go. Some of the most common alternatives are Bankruptcy, Individual Voluntary Arrangement, Debt Relief Order, Debt Consolidation, Asset Sale & Debt Settlement and Property Remortgage & Debt Settlement. It may even be that financial assistance is available from a member of the debtor’s family or friends.