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A Debt Management Plan (DMP) can be a great solution to tackling mounting non-priority debts, such as credit cards and personal loans. An informal agreement between you and your creditors, it allows you to make affordable monthly repayments for these costs and still have money left over to pay for all your daily living expenses.
While some companies charge for Debt Management Plans, in theory you can manage one yourself. Furthermore, there are organisations out there which will provide DMPs for free.
To find out if you would qualify for a free Debt Management Plan, or another debt solution, click the button below:
Debt Management Plans are typically set up by DMP providers. When applying for one of these agreements, the provider will arrange an initial consultation with you to discuss your circumstances.
However, a Debt Management Plan is only an informal agreement and, therefore, is not legally binding. Consequently, the plan can be rejected by your creditors – or yourself – at any time.
The Debt Management Plan process varies from provider to provider but, broadly, it follows these steps:
As mentioned, you can create your own Debt Management Plan. However, if choosing this option, you should still seek specialist advice on the best way to run it. If you choose a provider though, a trained professional will represent you. Considering some companies and charities offer a free debt management service, it generally makes sense to remove the extra stress and choose a firm to help you.
Next, you’ll analyse your monthly income and outgoings to identify how much you can reasonably afford to pay towards your debts. Although you can come to this figure yourself, a DMP provider will help analyse this information for you.
The next step can be quite stressful if you’re doing a Debt Management Plan by yourself. The budget – and the proposed Debt Management Plan – must be presented to your creditors. Ultimately, they will decide whether to accept the arrangement.
If so, they might also freeze interest and charges. However, this is not guaranteed. Another reason why you may wish to work with a DMP provider is that they generally have more success convincing creditors to do this.
If your lenders don’t accept the Debt Management Plan then you may wish to pursue another solution to reclaim control of your finances.
If your Debt Management Plan is approved, you need to make the agreed payments. If a DMP provider is handling the arrangement, you’ll make your payments to them instead of the creditors.
A DMP can only be used for resolving non-priority debts. These are arrears where the consequences of non-repayment are not as severe as other debts. For example, falling behind on your council tax (a priority debt) could potentially lead to prison. Not paying credit cards, on the other hand, may lead to legal action such as bailiff visits.
Debts you can put on a DMP usually include:
You will only qualify for a DMP if your debts are classed as non-priority. As well as this, you’ll usually be eligible for a Debt Management Plan if:
Generally speaking, there is no required amount of debt needed to qualify for a Debt Management Plan. As long as you’re able to still make some payment towards your creditors while meeting costs for ‘essential’ bills, such as council tax and rent, you could potentially get a DMP.
There is no specified length for a Debt Management Plan but – generally – these agreements tend to last between five and ten years.
The length of a DMP will depend upon several factors. For example:
Someone with a relatively small amount of debt making large payments each month will repay what’s owed faster than an individual in the opposite situation. You can estimate how long your Debt Management Plan would last by:
For example, if you were making payments of £70 per month to resolve a debt of around £6,000, you could expect the Debt Management Plan to last approximately seven years.
There are several advantages and disadvantages to a Debt Management Plan. We have detailed these below:
Similar to other financial solutions, a DMP carries a variety of pros and cons. However, there are several benefits which make Debt Management Plans the preferred choice of many:
A Debt Management Plan does carry several disadvantages compared to ether solutions. For example:
Details of the Debt Management Plan should be included on your credit report, especially if you’ve struggled to make agreed repayments. Although the DMP does suggest you’re taking action to rectify the situation, lenders may be wary to provide additional credit.
A DMP will likely have a negative impact on your credit rating and, for a while, you may find it difficult to access other financial solutions.
In time though, especially after your debts have been resolved, your score should improve.
Although a Debt Management Plan isn’t specifically registered on your credit report, missed payments or legal action related to your debts will be removed six years after those incidents took place.
Although creditors can refuse a Debt Management Plan, it’s worth bearing in mind this is relatively unlikely to happen. After all, assuming the proposal is reasonable and shows clear benefit to them, most creditors will accept a DMP.
Yet, if this occurs, it’s essential to coordinate with your DMP provider. He or she will be able to examine the situation and determine the best way to proceed.
Debt Management Plans are informal agreements which means they are not legally binding. Although this means you can cancel the arrangement at any time, your creditors can as well.
As a Debt Management Plan is not legally binding, it may not stop bailiffs. However, the answer to this question depends upon your circumstances. If bailiffs are still threatening to visit, you may wish to seek debt advice from your DMP provider.
Choosing a debt solution can seem like a daunting prospect due to the choices available. However, one of the most popular options a DMP is compared with is an IVA. Ultimately, both aim to help you get on top of your debts but they go about it in very different ways:
There are multiple differences between an IVA and a DMP. We have covered the main ones below:
Although there are several pros and cons to an IVA, the solutions are very different and which one is best will depend upon your circumstances.
Whether an IVA is better than a Debt Management Plan is largely subjective. However, this option might be the best choice for you if:
If you have the funds available to make regular payments each month towards your non-priority debts, then a DMP could be ideal for you. If you want to find out more information, get in touch with one of our friendly advisors and they could assist you in finding your ideal debt solution.
Debt write off applies to unsecured debts and on completion of an IVA. A debt write off amount of between 20% and 80% is realistic, however the debt write off amount for each customer differs depending upon their individual financial circumstances and is subject to the approval of their creditors.
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