When you run into financial difficulties and are unable to repay your creditors, one of the solutions you are likely to become aware of is to enter into a Debt Management Plan (DMP).
This solution could be called one of the big three in the UK in terms of the number of debtors who avail of it. The other two big solutions are Individual Voluntary Arrangements and Bankruptcies. Although no official figures are available it is estimated that there are up to one million consumers in the UK currently in debt management plans with their creditors. A DMP can be a self administered one where the debtor reaches agreement with his or her creditors to repay debts on a (more or less) pro rata basis i.e. the amount you repay to any individual creditor is in the same ration as that debt is to the total debts. If you owe £2,000 to one of your creditors and you owe £20,000 in total to all creditors, then 10% of what you can afford to pay each month goes to that first creditor.
Most DMPs however are not self administered but are managed by specialist companies – Debt Management companies who negotiate with creditors on behalf of the debtor and who administer the debt management plans. The debtor forwards the funds each month to the Debt Management Company. It in turn distributes them to the creditors, having retained its agreed fee. Such DMP companies in the UK have hundreds and sometimes thousands of clients on their books.
So why do DMP companies get bad press, from time to time? Perhaps one of the reasons is that the process is somewhat under regulated in that it doesn’t fall under the aegis of the Insolvency Act. As a result, some service providers have been accused of making false and misleading claims in their advertising, of providing poor advice to debtors and even of overcharging their clients with the result that the OFT have recently told a number of such companies to take immediate action to clean up their act.
The big attraction in DMPs is that it is an informal arrangement with creditors so that the name of a debtor in a DMP does not appear on the Insolvency Register. Theoretically the credit rating of a debtor who enters a DMP should not be negatively affected but in practice, it probably was already affected before the DMP commenced. The true effect of DMPs is that the term of repayments of debts is (considerably) extended and while some creditors may stop charging interest and penalties (for some time at least), it may take a long time (ten years in some cases) before the debts are repaid. The other big attraction of a DMP is that you do not have to be insolvent to enter a DMP, unlike an Individual Voluntary Arrangement or Bankruptcy.