What is a Debt Management Plan? Everything You Need To Know

What is a Debt Management Plan?

A Debt Management Plan, often abbreviated to DMP, is a formal agreement that allows you to repay your debts at a reduced rate.

It can be either an informal or formal arrangement with creditors and may include consolidating some of your debts into one payment while paying off the rest of your creditors less.

Debt management plans have been available in the UK since 1990 when new rules set down by the Consumer Credit Act came into force.

The Debt Management Plan Process

When you seek advice from a debt management company about a DMP, they will ask you for details about all of your liabilities including credit cards, loans and hire purchase agreements along with any arrears on them.

They will then work out how much money would be left over for you to live on if all your debts were paid off through the DMP.

This amount is known as surplus income, and it could be used for non-essential items such as holidays or luxuries

It may also include contingency sums in case another bill falls due while your Debt Management plan is ongoing, so you always have funds available to pay out any new debts that might crop up during this time.

Once they’ve determined how much money will be left over for living expenses and contingency sums, they’ll work out how long it would take you to clear all the debts using this DMP. This is called the Debt Management Plan term length. Debt management companies usually offer terms of two to five

How Does a DMP Work?

In a Debt Management plan, you’ll normally not have to make monthly payments to each creditor. Instead, the Debt management company will consolidate all your debt into one payment that is made directly from you to them

This allows the Debt Management Company to take control of all of your repayments and distribute them among your creditors.

For example, if there were three creditors included in the DMP and each owed £1000, a Debt management company would use a total of £3000 as repayment towards those debts – but only charge you for two thirds of this sum. They keep one third as their fee/commission for arranging it for you.

Fees For A DMP

It’s natural to feel wary about handing over money to a Debt Management Company in exchange for a Debt Management Plan, however Debt management companies are legally obliged to fully disclose their fees before you sign up.

In most cases, they’ll charge a one-off fee which is usually applied as an amount deducted from your debt repayments each month

For example, if the Debt Management company charges a fee of £45 per month and there were three creditors included in the DMP totalling £1000, these creditors would only receive £1960 over 60 months rather than £2000. The remaining £140 would cover administration fees.

The Debt management company might also charge an arrangement or set up fee for preparing the DMP on your behalf. This will be deducted along with other monthly fees from your Debt Management plan, but if you fail to keep up repayments then these fees will not be refunded.

How Long Does a Debt Management Plan Last?

Debt management plans normally last for a period of 5 years, with the option to agree a further DMP plan afterwards if required.

You will have to make repayments for the Debt Management Plan every month until your debts are cleared.

If you miss payments, you could be penalised with hefty interest charges or even lose this Debt Management Plan – which means you would still be liable for your old debts.

What Happens at the End of A DMP?

At the end of the Debt Management Plan term length (usually 5 years), all outstanding amounts under your Debt Management plan must be paid off in full.

You will then enter into another Debt management arrangement that should take into account any balances that may remain on your credit file

How Does a Debt Management Plan Affect Your Credit Rating?

A Debt Management plan will have a significant impact on your credit rating

The Debt Management company will add a note to your file confirming that you are under Debt management. This may stay on your report for up to 6 years, even if you’ve completed the Debt Management Plan successfully

So long as you continue to make payments (and keep borrowing responsibly) during this time, it should be possible for your score to rise again over time.

Debt management companies don’t affect whether or not you can actually borrow money; they simply act as an intermediary between yourself and creditors. However if you miss any debt repayments, lenders could interpret this (correctly or incorrectly) as unwillingness to pay back debts – which might make it difficult for you to access loans, credit cards or mortgages in future.

How Long Does a Debt Management Plan Take To Setup?

If Debt Management companies are approved by credit reference agencies, it may be possible to set up Debt Management plans quickly.

If you have a lot of outstanding debts this could be quite helpful – you wouldn’t want to have debts on your record for years longer than necessary. Debt management plans can usually take between 6 and 8 weeks to arrange

But Debt Management companies do not operate on a not-for-profit basis so fees may escalate if they need to contact creditors several times in order to negotiate reduced repayments.

What Counts As Debt For A DMP?

You must use a Debt Management company that specialises in dealing with all types of debt. So whether there are multiple creditor or just one creditor involved, the Debt Management company will be able to help.

Debt management companies do not just deal with unsecured consumer debts such as credit cards, but also include money borrowed for personal loans and mortgages – which can prove difficult to repay if you find yourself out of work

What is Debt Management Help? Is Debt Negotiation the Same Thing?

Debt negotiation and Debt Management are often confused, but Debt Negotiation (which we’ll look at soon) is very different from Debt Management.

Debt negotiation differs from Debt Management in that it doesn’t involve a third party company acting on your behalf; instead you would negotiate directly with your creditors and try to reach an agreement about reducing the amount of debt repayments that you need to make (this could result in lower monthly

How To Get a Debt Management Plan

Most Debt Management companies work on a ‘no cure, no pay’ basis – which means you won’t be charged if they can’t reduce your Debt Repayments.

Debt management companies operate on the assumption that most people want to repay their debts, but need some extra help doing so

Debt Management plans are not suitable for all types of debt. Therefore before committing yourself to Debt Management plan you should ask your Debt Management company for more details about what type of Debt Management service they offer

It’s also worth noting down how much money will need to be paid back during the Debt Management plan (the minimum monthly repayment). If you find the total figure daunting, it might be better to try and negotiate lower payments with creditors directly instead – although Debt Management plans are more likely to lead to lower monthly repayments.