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The Features and Pros and Cons of a Debt Management Plan

A man wondering whether or not Debt Management is right for him.

When you have debts piling up, it can feel like there’s no way out. But there are many options for someone struggling financially. One of your options for overcoming debt is a Debt Management Plan (DMP). But how is this different from managing arrears by yourself?

What is a Debt Management Plan?

A DMP is an informal agreement between you and your creditors, arranged by a third party. In layman’s terms, it’s a way to change several monthly payments to different creditors into one monthly payment. A financial assessor will talk it through with you to create a realistic budget that you can afford to stick to.

A Debt Management company will work with you to create the plan. A DMP is informal and not legally binding, this means the DMP company will propose the plan to your creditors, and they can choose to accept or not. Lenders are likely to accept because it shows you are willing to pay off your debts and are happy to repay what you can afford to pay whereas, without one, you may be missing payments or not paying in full.

What are the pros?

A DMP may allow you to pay back less each month than you were originally, leaving you with more spending money per month.

If creditors agree, they may be willing to freeze charges and interest rates on your debts.

It could also mean your creditors will stop contacting you – this means no more letters and phone calls, and potentially less stress!

It’s more private than other options. With debt solutions like an IVA or bankruptcy, you’ll be put on an insolvency register which means your financial situation is public.

Bad credit? No problem.

You will be considered even if you have a bad credit score. However, a DMP will affect your credit rating meaning you might find it difficult to get more credit in the future.

When are you eligible?

Eligibility depends on several factors:

  • You must have 2 or more creditors
  • Your debts are “unsecured debts” which are debts that are not guaranteed against a property or any other asset that you own
  • Your debts are non-priority such as credit cards, store cards, catalogue debts, and personal loans like payday loans, etc.

When is a different option a better idea?

It might be better to consider a different option such as an IVA or bankruptcy, if:

  • You won’t be able to repay your debts in a reasonable time
  • You can’t afford any kind of monthly repayment

If you speak to one of our Financial Assessors, they will take into consideration all your circumstances, once they have done that, they will be able to pre-sent you with all of the options that are available to you, which will allow you to make an informed decision that meets your needs.

What are the cons?

Although a DMP is informal and can be flexible, it’s not always the right decision for everyone.

It is not legally binding – this means creditors don’t have to accept it

Your interest charges may not be frozen

Creditors can stop the agreement if they want

You can still be issued with a County Court Judgement (CCJ)

Your credit rating will be affected

It only covers non-priority debts

Is a Debt Management Plan safe?

All companies that offer DMPs must follow the FCA’s Debt Management Plan Protocol. This means all DMP companies are regulated and must meet a minimum standard to offer their services, such as being honest and not misleading you about how realistic your goals are or their fees. They will endeavour to give you all the information you need before deciding and they will be realistic about your financial situation.

Breathing Space

If you’re finding it hard to choose a debt solution or work out what your next step should be, a good idea would be to apply for Breathing Space.

This scheme stops creditors from contacting you and freezes interest rates for a pre-determined period.

There are two kinds of breathing space:

With standard breathing space, you will have up to 60 days where creditors will pause most interest rates and charges and stop contacting you. There will be reviews on days 25 and 35 to see if you still need them.

Mental Health Crisis breathing space is for people who are undergoing mental health treatment and need a break from debt worries. It will last for the duration of the treatment plus 30 days. However, it needs to be approved by a mental health practitioner.

However, it’s worth noting there are some debts that you can’t include in the scheme:

  • CCJs (county court judgements)
  • Student loans
  • Crisis loans
  • Universal credit advances
  • Maintenance arrears such as child support or child maintenance
  • CCO (criminal confiscation order) debts

Making a final decision

There are many elements to consider when deciding which debt solution is the best for your situation.

The best advice you can get? Speak to an expert. Our team of financial assessors have years of experience and will give you honest advice about which debt solution is the right choice. We’ll deal with creditors on your behalf, so you don’t have to deal with the stress of them sending you letters and knocking on your door. We’re here to support you to repay your debts and get back into the positive, both in your wallet and in your life.

Contact us today to see how we can help.

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