What is a Debt Management Plan?
Date posted: November 20, 2013 by Paddy Byrne
A Debt Management Plan is an informal and flexible approach, the purpose of which is to resolve personal debt problems where the debtor has difficulty in repaying debts as they fall due. In a Debt Management Plan creditors can expect to be repaid in full over a period of time. The rate at which creditors are paid is based on what the debtor can afford on an ongoing basis. Some Debt Management Plans can last for years and the duration of a Debt Management Plan depends on the debtor’s personal financial circumstances. Should you choose to engage a debt management company to assist in putting a Debt Management Plan together, it can estimate how long the Plan will last, once you have provided the necessary information on your financial and personal circumstances.
Of course you don’t have to use a third party to enter into a Debt Management Plan with your creditors. A person can put one together themselves, offer it to creditors and negotiate with creditors to reach agreement on the plan. Such a person can administer their own Debt Management Plan and deal directly with their creditors on an ongoing basis. This type of Debt Management Plan is sometimes called a self administered Debt Management Plan or a or a DIY Debt Management Plan. However, most persons who enter a Debt Management Plan do engage the services of a debt management company or they may seek help from one of the organisations which offer free advice or assistance and whose running costs are sometimes usually by creditors. If you decide to use a commercial debt management company to assist you, make sure that you ask them to explain the full range of financial solutions that may be available to you.
Because a Debt Management Plan is an informal process, your creditors cannot prevent you from obtaining further credit while your Plan is up and running. However, it is against the spirit of the plan that you should do this. Creditors who may have agreed to accept your Plan 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 Plan, you committed to use all of your disposable income to address and repay your pre-existing debts and not to increase your indebtedness any further during the term of your Plan.
All unsecured debts such as loans, credit cards, store cards and bank overdrafts are covered in a Debt Management Plan and you expect to repay all of these debts over time. On the other hand, your secured debts such as your mortgage or any HP agreement you may have, 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 any of them.
The advantages of a Debt Management Plan can be summarized as follows: creditors often prefer Debt Management to any other debt repayment process, other than of course repaying all of your debts fully as they fall due in accordance with the terms and conditions of your original credit agreement with them; you do not necessarily have to release any equity from your property; you will repay all of your debts over time, provided you adhere to the payment plan you have agreed to; your financial details will not be published on the Insolvency Register; you only pay what you can afford and the Debt Management Plan 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 if your creditors have incurred any collection costs, they will normally be added to your debt.
If you use a commercial debt management company to administer your Debt Management Plan you will have to pay fees to them. These fees vary somewhat from one company to another. Typically a Debt Management company charges a set up fee equal to your first monthly payment into the Debt Management Plan, 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 per month and a maximum of around £100. As you shop around, you will find that charges may vary.
Entering a Debt Management Plan does negatively affect your credit rating although it may already have been affected if you have already accrued 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 Debt Management is flexible and informal, it is not as rigid as other processes and so the process can react quickly if you encounter a sudden change in your circumstances, for better or for worse. If this happens, you should contact the company administering your Debt Management Plan and inform them of any such changes. They 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 Debt Management are employed they do not necessarily need to be, provided they have a source of income that is more than they 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 Debt Management Plan, 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 Debt Management 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 Arrangements or IVAs, 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 Debt Management Plan inadvertently.
Insolvency is not a requirement for entering Debt Management. 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. Debt Management 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.