Debt Management Plans are Voluntary
A Debt Management Plan (DMP) is a plan to repay all of your debt but at a slower rate and over a longer period of time than you agreed to do originally when you took out your loans or when you entered into your credit agreements. In other words you are suggesting to your creditors that you will repay your debts to them but not in accordance with the original terms and conditions.
From the point of view of your creditors you are telling them that you want to change the terms of your contracts – pay less per month over a longer period of time – because you cannot afford to make the contractual payments to all of them. You are also saying that you want to treat all of them equally in the sense that you will distribute whatever surplus income you have to them on a pro rata basis. You are volunteering to do this and you are asking them to accept your reduced payments because that is all you can afford but you do plan to repay all of the debts over time.
Benefits of a DMP for Creditors
Although creditors would really prefer that you honour the terms of your original contracts and make loan repayments in full and on time, if you are unable to do this, they want to maximize the amount that you will repay and minimize the total length of time that it will take you to make your repayments in full. Creditors prefer that you enter into a DMP than if you were to go bankrupt – in which case only a small amount of your debt would usually be repaid. While an IVA would give creditors a better return than bankruptcy, it still does repay debts in full.
Must Creditors Freeze interest in a DMP?
No. Because it is a voluntary proposal to reschedule your debts, there is no obligation on creditors to freeze interest. Nevertheless, the vast majority of creditors if asked will agree to freeze interest in order to assist you to comply with your DMP and keep up the payments. They may not freeze interest immediately your DMP starts, but once they see that you are keeping to the terms of payment, they will generally do so, usually within a three to six months period. Creditors are aware that if they do not freeze interest, your total debts may actually increase as time goes on so that you will never fully repay all your debts. At the very least the term of your DMP can be very long and this can be very disheartening for you the debtor. Creditors are also aware that if they refuse to freeze the interest, you may choose an alternative solution to your financial problems by petitioning for your own bankruptcy or entering into an IVA. In these scenarios, interest is automatically frozen and creditors can do nothing about it.