A Debt Management Plan, or DMP as it is commonly known, is an informal agreement between you and your creditors to pay back your unsecured debts with a monthly payment that you can afford. Your monthly payment is determined by carrying out an analysis of your individual circumstances and seeing what is realistically affordable for you to pay.
By looking at ways of maximising your income or reducing any overspending and by identifying and prioritising your most important debts a Financial Statement can then be produced which reflects your personal circumstances (see section Help Me Out Of Debt for details on how to do this). A DMP can last until your debts are repaid in full or until you or your creditors want to come out of the agreement. It can be a good way for you to reorganise or get on top of finances that have gotten slightly out of control or very unmanageable.
A Debt Management Plan does not have to be produced professionally but there are a great many reputable Debt Management Companies who will act on your behalf:
A Debt Management Plan is basically a simple and effective way to pay your non-priority creditors. Simply put, you (or your Debt Management Company) calculate the amount you can afford to pay after giving consideration to your priority debts – mortgage, utilities, council tax etc and day-to-day living expenses. Any money left is then to be distributed to your non-priority creditors.
Whilst you can put together and agree a DMP with your creditors yourself there are advantages in employing a Debt Management Company – They are highly experienced and will negotiate reduced payments on your behalf with your creditors. In many cases the creditors will also agree to totally freeze or reduce the amount of interest being charged on your accounts.
A DMP organised and agreed through a Debt Management Company will give you:
• Professional assistance in dealing with your creditors.
• The management company will handle and reply to all creditors letters and enquires.
• Payments you can afford and a reduction of your debt.
• You make only one payment direct to the DMC. They divide the payment fairly between all your creditors.
• Regular reviews of your circumstances and your monthly financial circumstances.
A DMP can only cover unsecured debts or arrears.deposit amount changing to reflect your situation. They are not legally binding so creditors do not have to agree to repayment schedules. However, if the arrangement works well the creditors will be happy to co-operate.
Debt management can be an excellent solution to manage your debts, but it will depend on your individual situation. For example, an IVA (Individual Voluntary Arrangement) or another debt solution may be of more help, so make sure you are certain it’s the best solution for you or talk to an expert (for free) first.
Debt Management Advantages
• Affordable monthly payments.
• Interest on current debts and loans may be frozen.
• A third party can deal with your creditors so you don’t have to.
• Your home will not be at risk if you keep up payments.
• You have access to help if creditors contact you.
• It’s confidential so your friends and family don’t need to know if you don’t want them to.
Debt Management Disadvantages
• Not a legally binding contract.
• Creditor’s can still contact you.
• The debt does not go away.
• A DMP can take a long time to complete.
• Your credit rating will be affected.
• Interest may sometimes continue to build up.
When considering debt management, you should also be aware that unlike an IVA (Individual Voluntary Arrangement), it is not a legally binding agreement. There may be other debt solutions available that are more suitable to manage your debt.
Debt can be caused by so many different reasons, in many cases it’s through no real fault of the individual but due to a change of circumstances for example the loss of a job, a long term illness, divorce, separation or any other life changing event. Most people will try to deal with debt themselves initially and find it difficult to admit they need help but if you have more money going out than coming in then you need to deal with the situation and get help and advice – there’s really nothing to be ashamed of at all.
When the individual finally reaches a point that they realise they need help and have to take some drastic action or they can’t see an end to the phone calls and letters from the people they owe money to. When the debts are increasing on a daily basis with added interest and charges and their payments are not actually reducing the balance then it’s time to consider a debt management plan as a possible solution to the problem.
A debt management plan can put you back into control without borrowing more money (experience shows that this can just make things worse). With only one payment to make and a realistic chance of getting your interest and charges frozen and no fees taken out, your debts will be repaid as quickly as possible.
Other solutions are available so talk to a professional before deciding on the right option for you and your situation.