A debt management plan is a method of making reduced monthly repayments towards the creditors of all of your accumulated unsecured debts in order to repay the total sum of the debts in a single preferable more manageable manner.
A DMP is set created to assist those struggling to meet debt repayments but who still have money available after paying all essential day-to-day living expenses.
You will make one monthly payment to your DMP provider who will make all payments to your creditors on your behalf.
A DMP is not a legally binding contract. This means you can cancel and leave the plan at any time you wish.
What debts can I include on a DMP?
Most unsecured loans can be included on a DMP. These include credit cards, overdrafts, personal loans, store credit, catalog credit, payday loans, and telephone contracts.
Secured loans such as mortgages cannot be included and will need to be paid as normal. Your regular utility and household bills will not be included on a DMP but if you have arrears owing to your suppliers you can often arrange to have these included as part of your DMP.
Other regular payments and repayments such as student loans, child support, CCJs, and other court fines, will all need to be paid separately as you were before taking out your DMP.
How does a DMP work?
The first step in considering your debt management plan is to create an accurate budget. This needs to be a realistic account of all the money you earn and how much you pay on your regular monthly outgoings. Your outgoings should include your mortgage or rent payments, all utility bills, food shopping, your transport to and from work, and any other costs that aren’t viewed as luxury items that are realistic costs detailed as fair living expenses. Your provider will help you outline and gather all the required information for putting together a budget suitable for a DMP application.
Once you have your completed budget your DMP provider will contact each of your existing lenders to discuss amending your current arrangements to a program of new and more manageable repayments. These new payment amounts will allow you a more comfortable method to pay back your loan amounts in full, although probably over a longer period of time.
Occasionally a DMP can be arranged by an individual but your lenders will be much less likely to agree to a plan that isn’t arranged by a financial professional or a reputable debt specialist.
It will be this specialist, your chosen DMP provider, who will handle making all payments to your lenders leaving you only responsible for making a single payment each month to them.
The benefits and risks of arranging a debt management plan
You should only have to pay what you can realistically afford. Your DMP provider will ensure that your budget is practical and the repayment amount is in line with your income and outgoings.
As long as you make your regular monthly repayments you can often add arrears from existing household bills to your DMP to help you stay in control of any changes in your finances.
You have only to make a single payment to your DMP provider instead of organizing numerous payments to each of your creditors.
Your DMP provider will regularly revisit your budget to be assured that your repayments are continually manageable.
Your DMP provider will try and arrange for your creditors to stop charging additional fees or interest on your outstanding loan. However, they don’t have to agree to this and any additional charges could increase your total debt amount putting an additional financial strain on your budget.
Your creditors should no longer need to contact you, but again, they are entitled to if they consider it necessary.
If you fail to meet your new repayment terms your creditors are still entitled to pursue court action to retrieve the debt; for example, applying for a County Court judgment or other debt collection facility.
You will find it almost impossible to secure further debt while paying into a DMP.
How do I get a DMP?
Practically all financial and debt advice is available for free so it makes sense to consult a professional to make sure a DMP is the best option for you. If other routes to ease your specific debt issues are available a financial advisor or debt management company will be able to advise you of each of them and guide you into choosing the best possible outcome to your situation.
Make sure your DMP provider is reputable. Check that they are authorized by the Financial Conduct Authority. The FCA regulates all financial service firms and markets in the UK to ensure fair behavior to each of their users.
You should also make yourself aware of all fees associated with your DMP. Find out if they are payable separately to the DMP or included into the total repayment amount. This should not only include set up fees but any additional costs that will be charged for the work involved due to changes in circumstances.
Can I change my DMP provider?
If you feel that your DMP provider has let you down in any way or if they have ceased trading you are entitled to move your DMP to another provider. Again, you should consider all associated fees when considering this move, as additional costs could cause further problems to an already tightly stretched budget.
Does a DMP affect my credit score?
Yes. Applying for a DMP to repay your creditors means that you’ve broken the terms and conditions of your existing loans. Although a DMP won’t show up on your credit report, the reduced payments made to your lenders will. Details of missed or failing to make the original payments will also show, as will any court action applications. All of these are elements that affect your credit score and alert lenders to the level of risk you represent when applying for further loans. Check this nationaldebtadvice.org.uk
Any failed or missed payments, or court action arising from debt issues, will be removed from your credit file after 6 years. This happens whether the debts are paid in full or not.