What is a Debt Management Plan (DMP) and will it help me pay my debts?
A debt management plan (DMP) is an informal agreement between you and your creditors to help you manage your non-priority debts and get out of debt. Examples of non-priority debt can include bank or building society loans, credit card loans, student loans, water bills and benefits overpayments. A debt management plan can allow you to pay these debts back in reduced instalments over a longer period of time.
How do Debt Management Plans (DMPs) work?
A debt management plan isn’t a legal agreement, so you’re not bound to it for any specific period of time. Although you may be able to arrange a DMP with your creditor, they’re usually managed by debt management companies, who deal with the creditors on your behalf. First you’ll agree on an amount to pay back monthly that you can afford. You make this payment to the debt management firm, who will ensure that your creditors receive the money. You’ll have to learn to budget your finances so that you can make your monthly repayments.
Is a Debt Management Plan the right solution for me?
This depends on your situation and circumstances. A debt management plan is typically used for unsecured loans. DMPs can be useful if you have some extra money each month to put towards it – that is, after you’ve paid for essential living expenses and made repayments for your priority debts. If you are on the County Court Judgement (CCJ) Register, you can’t add a CCJ to your debt management plan, as a CCJ is a formal court agreement and a DMP is an informal debt repayment plan.
Pros and cons of Debt Management Plans
As with any other financial solution, debt management plans have pros and cons.
- The benefits include the following:
- A debt management company can help you to figure out how much you can pay back monthly.
- The debt management company will help to negotiate with credit creditors on your behalf.
- You can increase or reduce your repayments depending on your circumstances.
- You make one monthly payment to the debt manager, who will distribute the funds to your creditors on your behalf.
- The risks include the following:
- As a DMP is an informal agreement, the debt management company cannot guarantee that all of your creditors will take part or freeze interest on payments.
- This also means that creditors may also take court action against you if you’re late on repaying debt.
- A DMP may affect your credit rating.
- Not all debt managers offer free debt management services.
- If you select a debt management company that charges fees, it’ll take you longer to repay the debt on your DMP, as you’ll have the extra cost to deal with.
Can I get a free Debt Management Plan?
Yes, some debt management companies offer free debt management plans. Main providers of free DMPs in the UK include National Debtline, StepChange and Payplan. All providers must be authorised by the Financial Conduct Authority (FCA), which means that they need to meet set standards.
What is the process for setting up a Debt Management Plan?
Generally speaking, you’ll need to:
- Manage your priority debts
Since DMPs cover non-priority debt, you’ll need to handle your priority debts first. These include things like your mortgage, rent, council tax, income tax, National Insurance, court fines and TV licences.
- Decide whether a DMP is the right solution for youstrong>
If you’d like to get impartial advice, you can contact organisations like National Debtline and StepChange.
- Decide whether to use a free debt management company
Bear in mind that paying for a company to help you with your DMP will add to your outgoings.
- Figure out your budget
It’s important that you know how you’ll be able to make repayments on a DMP. A debt management company can help you with the budgeting.
- Choose a debt management company
Select and contact a debt management company to speak to about your circumstances.
Do Debt Management Plans affect my credit score?
While a DMP can help you to manage your debt repayments, may also affect your credit score. If there is a note on your credit report saying that you have a DMP, this could show that you’ve had problems with making repayments, and could make it harder for you to obtain credit. However, if you’re able to demonstrate that you’ve made your DWP payments on time, this would show that you are more financially responsible than if your credit report only showed your unpaid credit debt. Your creditors may still record that you’re missing payments as you’ll be making smaller repayments with a DMP.
The note may remain on your credit file for a period of time after you’ve completed your DMP payments. This could have an effect on your ability to get credit in that duration.
- Debt consolidation for secured and unsecured loans
- Debt consolidation loans for bad credit
- Infographic: Is the UK’s household debt out of control?
- Marriage and bad debt
- How to get out of debt
- What is the IVA register?
- How does debt consolidation work?
- The bankruptcy register explained
- The CCJ register explained
- Hiding debts from your partner
- What is the insolvency register?
- Debt Relief Orders explained
- Good Debt vs Bad Debt: What's the Difference?
- How do IVAs work?
- How Bankruptcy Affects Your Credit Score
- Understanding CCJs