If you’re struggling with debt problems in the UK, a Debt Management Plan (DMP) can be a helpful solution.
It is an informal debt solution that enables you to repay your debts at an affordable rate, making it an ideal option for those who can’t afford their monthly repayments.
With a DMP, you make a single monthly payment to a debt management company, who will then distribute the money among your creditors.
In this article, we’ll explore Debt Management Plans in more detail, including how they work, how they help you organise what you owe into priority and non-priority debts, and how a DMP could affect your credit profile.
What is a debt management plan (DMP)?
A Debt Management Plan, or DMP for short, is an agreement between you and your lenders that allows you to pay back your debts in a way that’s affordable to you.
Unlike other solutions, it is not legally binding and is designed to help those who are struggling with their unsecured debts.
You will agree to make one monthly payment towards your debts (usually at a discount) and will need to pay these until your debts have been cleared.
This means your plan could last any reasonable amount of time, but they generally can last up to 10 years.
You can set one up yourself or through a debt management company. However, if you decide to use a third party, you may have to pay fees. In some cases, you may be able to get interest and charges frozen on the debts, but this would be the lender’s decision and isn’t guaranteed.
Priority debts vs non-priority debts
It’s important to know the difference between priority debts and non-priority debts when considering which debts to include in a DMP.
Priority debts require urgent attention to avoid legal action, while non-priority debts can be managed alongside them.
Priority debts are debts that are considered more urgent or important and should be paid off before non-priority debts.
Examples of priority debts include council tax, rent arrears, and mortgage arrears.
These are essential payments that need to be made to avoid legal action or the risk of losing your home.
If you have priority debts, it’s important to deal with them as soon as possible and seek advice if you’re struggling to make payments.
Non-priority debts, on the other hand, are debts that are not considered as urgent or important as priority debts.
Examples of non-priority debts include credit cards, store cards, and payday loans.
While it’s still important to pay off these debts, they are not as urgent as priority debts and should be managed alongside your priority debts.
If you’re struggling to manage your non-priority debts, you may want to consider a Debt Management Plan (DMP) as a possible solution.
Are there fees charged in a DMP?
If you decide to set up a DMP through a third party, there may be fees charged for administering your plan.
For the most part, this will be taken out of the payments you make each month, but in some cases, it may have to be paid upfront.
There are companies out there that will set up an arrangement for you for free. However, this doesn’t mean that there are no fees for their services – they’re just paid by the lenders instead.
Regardless, any charges within your arrangement must be made clear to you before the agreement is put in place – as required by the Financial Conduct Authority (FCA).
If they are not, then you must bring this to the attention of your DMP provider of the Financial Ombudsman Service.
DMP advantages and disadvantages
If you’re still unsure whether this is the right solution for you, here are the advantages and disadvantages of a DMP:
Advantages of a Debt Management Plans
- Simplifies debt repayment with a single, manageable monthly payment.
- Stops creditor letters and calls, reducing stress and annoyance.
- Offers flexibility with payments that adapt to changing financial circumstances.
- Timely payments through a DMP can potentially boost your credit score.
- Professional DMP providers handle negotiations and distribute creditor payments.
Disadvantages of a Debt Management Plans
- Debts aren’t written off with a DMP; you must repay balances in full.
- DMPs may last up to 10 years due to the lower level of payments.
- No guarantee of interest and charges freeze; lender discretion applies.
- Still susceptible to court action and potential harm to credit score.
- DMPs are noted on your credit file until completed, affecting credit rating.
The DMP process
There may not seem like much to the DMP process, but if you decide to enter into one on your own without the help of a debt management company, then it’s handy to know.
Get free debt advice
When deciding what debt solution is right for you, you’ll probably find that you qualify for more than one.
As such, the best advice to see if a DMP is the best option for your situation is to seek advice from debt advisers.
Do your research, and make sure you arm yourself with as much information as possible before making your decision.
Find a suitable Debt Management Plan provider
Once you’ve sought reliable debt advice and decided to move ahead with a DMP, the next step is to find a suitable DMP provider, also known as a debt management company.
These companies offer a range of debt solutions, including DMPs, to help people manage their debts and improve their financial situation.
A DMP provider typically works by negotiating with your creditors to agree on a suitable repayment plan that is affordable for you.
They’ll then manage your monthly payments, distribute the funds to your creditors, and provide ongoing support and advice throughout the plan.
Budget and DMP application
The next step is to work out your budget to know what you can afford to pay towards your debts.
You’ll need to consider all of your income and all of your outgoings before your debt payments to give you an accurate amount.
If you’re using a DMP company, they will help you with this. They will require you to send proof of these things along with all the details of the debts you wish to include in your plan.
The important thing here is to make sure that your budget is reasonable and affordable.
If you are unsure how to do this, there are several tools out there to help you.
Negotiation with creditors
Now that you laid all the groundwork, it’s time to propose this to your lenders.
There are templates available online that you can use to draft up a letter for this purpose to send to your lenders. DMP companies will do this on your behalf.
The companies you owe money don’t need to agree to what you offer, and this is where negotiation will come into play.
You or your DMP provider may need to do a bit of back and forth in order to come to an agreement over your payments and your plan.
Start monthly repayments
If your lenders agree to your DMP, then you are given the green light to begin making affordable repayments.
For those doing it on their own, you will then need to change all your payment amounts to each of the companies/people you owe money to.
If you are using a DMP company, then you will need to cancel all your debt payments and arrange to make your agreed amount to them instead.
All you then need to do is keep on top of these until you have cleared your balances and you no longer owe anything to those included in your plan.
Should your situation change at any point, it’s important that you communicate this to your lenders or DMP provider to allow any necessary changes to be made.
Will a DMP damage my credit rating?
A DMP is an informal agreement between you and your creditors to pay reduced monthly payments over a longer period of time.
While this can make your payments more manageable, it also means that you haven’t technically repaid your debts in full, which can be seen as a negative by lenders.
When you enroll in a DMP, it will be included on your credit report for six years, which can make it more difficult to get credit.
Additionally, some lenders may see a DMP as an indication that you have had difficulty managing your finances in the past, which could affect your ability to get credit at competitive rates.
However, it’s important to keep in mind that the impact of a DMP on your credit rating will depend on your individual circumstances.
If you keep up with your DMP payments and take steps to improve your credit rating, you may be able to rebuild your credit over time.
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Where can I get free Debt Management Plan advice?
Dealing with debt problems can be a stressful experience, leaving you feeling overwhelmed and uncertain about how to proceed.
However, there are several debt management solutions available to help you work towards becoming debt-free.
At Talk About Debt, our advisors can provide guidance on dealing with unaffordable debts, including options such as a Debt Management Plan (DMP) or an Individual Voluntary Arrangement (IVA).
Unlike many debt management companies, we’ve helped thousands of people find a way to move forward from unmanageable debt.
Contact us today to take the first step towards your financial fresh start.