A Debt Management Plan (DMP) is an informal flexible approach for resolving a person’s personal debt problems whereby creditors are repaid in full over a period of time. The rate at which creditors are paid is based on what the person can afford and thus a DMP can last for a long time, depending on the debtor’s personal circumstances. If you engage a Debt Management Company to assist you it can estimate the length of the arrangement, once it has received all your personal information.
You do not have to use a third party to enter into a DMP with your creditors. A debtor can administer his or her own DMP and deal directly with creditors. Such a DMP is sometimes called a self administered DMP or a SA DMP or a DIY DMP. However, most people who enter a DMP do engage the services of a debt management companies or of one of the charitable organisations which offer free advice or assistance such as the CCCS, CAB and Payplan. It pays to shop around among the commercial debt management companies to ensure that not only is the best advice obtained but the full range of financial solutions is adequately explored and researched.
Because a DMP is an informal process, your creditors cannot prevent you 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 will almost certainly reject it if they learn that you have broken the spirit of the agreement in this way. This is because when you entered the DMP, you committed to use all of your disposable income to address and repay your pre-existing debts.
All unsecured debts such as loans, credit cards, store cards and bank overdrafts are covered in a DMP and you repay all of such debts over time. On the other hand, 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. These secured debts have to be paid in full on an ongoing basis and you cannot fall into arrears with them.
The advantages of a DMP can be summarized as follows: creditors prefer Debt Management Plans to other processes for resolving financial difficulties; you do not have to release equity from property; you will repay all of your debts; your financial details will not be put on the Insolvency Register; you only pay what you can afford and the DMP is designed to suit your personal circumstances and needs. Remember however that creditors do not have to accept reduced payments or freeze interest and charges and there is no guarantee that any existing or threatened proceeding will be suspended or withdrawn and any collection costs incurred by your creditors will normally be added to your debt.
If you use a Debt Management Company to administer your DMP you will have to pay fees. These fees vary somewhat from one company to another. Typically they charge a set up fee equal to your first monthly payment into the DMP which means that creditors receive nothing for the first month. Thereafter, charges are usually a fixed percentage of your monthly payment. 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.
Entering a DMP negatively affect your credit rating although it may already have been affected if you have arrears on any of your accounts or if you have a history of missed payments or late payments. Your Debt Management Company negotiates reduced monthly payments to your creditors and this means that you will no longer be making the payments originally agreed. Thus the original contracts into which you entered with your creditors will be broken. Notes of these defaults may and probably will be made on your credit file. The credit reference agencies retain default records for six years.
Because a DMP is flexible and informal, it is not as rigid as other processes and so can react quickly if you encounter a change in your circumstances, for better or for worse. If this happens, you should contact your DMP Company and inform your liaison officer of any changes particularly relating to your income and expenditure or direct communications from your creditors. Your DMP Company can contact your creditors, communicate any issues that arise from your changed circumstances and propose solutions that satisfy both you and your creditors.
While most people who enter a DMP are employed you do not need to be, provided you have a source of income that is more than you require for living expenses. 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 obtaining employment with a reasonable level of disposable income. Even people whose entire income is comprised of benefits can offer a DMP to their creditors but since their level of disposable income is likely to be low, 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. Other solutions to financial difficulties which should be considered include Individual Voluntary Arrangement, Debt Consolidation, Asset Sale & Debt Settlement and Property Remortgage & Debt Settlement. The possibility of financial assistance from a family member or friend should not be overlooked.
Reputable Debt Management Companies offer complete confidentiality and privacy in relation to your DMP. No information about you is disclosed to any outside organizations including your employer. Particular care is taken when making contact with you to ensure that others will not find out about your circumstances. Obviously you need to behave discreetly yourself in your communications with your creditors and with your Debt Management Company to ensure that your employer does not become aware of your DMP inadvertently.
Insolvency is not a requirement for entering a DMP. It may be that your income combined with your assets is sufficient to pay off your debts in full in accordance with the terms of your contracts with your creditors. For example, you might have sufficient equity in your property to pay your debts when your income is taken into account but if you cannot obtain a re-mortgage, you might have to sell your home to realize that equity. A DMP might provide a means of postponing the sale of your home or giving you some breathing space until such time as you can obtain a remortgage on reasonable terms.