Debt Management FAQs

Understanding the differences between the ways to manage your debt is a really important part of the decision making process, to the extent that choosing the wrong debt management option could, potentially, add years to the time it will take you to become debt free.

Therefore, getting clear and accurate information and advice on the debt management process will be vital if you're to make the correct decision.

And so, to help you in this task, we've brought together the most frequently asked questions relating to Debt Management Plans as, we feel, this as good a place to start as any.

Debt Management Frequently Asked Questions

Where we felt it was necessary to give a more in depth answer, we will have written a dedicated article. To read any of those articles simply follow the link where you see the highlighted phrase 'Read more'.

What is a Debt Management Plan (DMP)?

A Debt Management Plan, also known as a DMP, is an informal debt solution that enables someone to reduce their monthly debt repayments when they cannot afford to repay their debts at the agreed monthly rate.

An approach is made to creditors, normally by a third party, where an offer of reduced repayments is made and a request is put forward to stop late payment and interest charges.

Repayments continue at the reduced level until the whole debt, including interest and charges have been repaid, or until the financial difficulties have been overcome. Read more.

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How does a DMP work?

A DMP relieves the financial pressure by reducing the monthly payments being paid to each creditor.

By using the structure of a Debt Management Plan, you ensure that each creditor is treated fairly and without preference. The plan does this by reducing the amount of money each creditor receives, based on the amount they are owed. All payments are calculated to be paid in ratio to the amount owed in total.

The more a creditor is owed in relation to the whole debt, the larger their share of the new 'affordable' repayment will be.

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How long does it take to set-up a DMP?

Generally speaking, Debt Management Plans are not difficult to set-up although, obviously, they do need to be managed with a degree of care.

Once creditors have been contacted and informed of the financial difficulties being experienced, payments can, and should, begin straight away.

Unfortunately, many commercial debt management companies tend to charge a set-up fee, equivalent to the first 2 payments into the plan, which has the affect of delaying the first payments to creditors.

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Who can qualify for a DMP?

There are no qualifying requirements needed to enter into a DMP, other than the fact you should be experiencing extreme financial difficulties.

That said, some commercial debt management companies prefer not to engage in cases where the debt level is less than £2,000 or repayments are lower than £100.

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How much will I pay each month?

Payments into a DMP should be set at what is affordable for the individual, based on their personal circumstances.

Unlike an IVA, there is no minimum payment ratio between the amount of debt owed and the size of the repayments. Creditors are not consulted when repayments reduce, instead they are simply informed of the new repayment.

This payment flexibility provides one of the main advantages of the DMP solution.

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Who pays the fees for a DMP?

If you use a commercial debt management company to provide your Debt Management Plan, then you will pay the fees for the DMP.

Most commercial debt management companies will charge you a set-up fee equal to your first 2 payment into the plan.

They will then charge you a monthly management fee of between 15% and 20% of your repayment.

The fees will be deducted from your monthly repayment before it is distributed to your creditors.

This has the effect of reducing the amount of money you will be repaying each month and, therefore, increases the time it will take you to become debt free.

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How long does a DMP last?

Because a DMP does not provide any debt forgiveness, the plan will continue until the financial difficulties being experienced have been overcome, and normal repayments can once again be resumed, or until the outstanding debts, interest payments and any late payment charges have been repaid in full.

There is, therefore, no set time limit for a DMP and, depending on the size of your debt and the amount you can afford to repay, projected repayment terms can range from 6 months to in excess of 100 years.

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Does a DMP guarantee to freeze interest?

No. Because a DMP is an informal arrangement there are no legal obligations on the creditor to accept the reduced payments.

This means that a creditor is completely within their rights to continue charging interest on any balance in a DMP.

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Will a DMP stop late payment charges?

No. Again, because of the informal nature of the DMP, creditors are not legally obliged to accept its terms.

If a creditor so wishes, they can continue to penalise someone in a DMP by charging late payment fines and administration charges in relation to the outstanding balance.

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Will a DMP stop legal action against me?

Being an informal agreement, a DMP has no legal standing at all.

Creditors retain all their legal rights in relation to the enforcement of your original contract. If a creditor so wishes, they have the right to take legal action against you for the none repayment of your debt.

Unfortunately, a DMP would be powerless to stop a determined creditor.

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Will a DMP write-off any debt?

A major difference between a DMP and an IVA is that an IVA has a fixed repayment term. Once the IVA reaches this fixed term, the remaining debts are written off.

This is not the case with a DMP.

A DMP will continue until all the outstanding debts, interest and late payment charges have been repaid in full.

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Will a DMP protect my property?

No, creditors retain the right to take legal action for the recovery of any unpaid debts being dealt with via a Debt Management Plan.

If a creditor is unhappy with the financial offer being made through the DMP, they can take legal action to recover the debt.

Actions available to creditors range from serving a default notice right through to serving a bankruptcy order.

For homeowners, this legal action could result in a 'Charging Order' against your property which, essentially changes the debt from an unsecured debt into a secured debt.

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How will my creditors react to my DMP?

When financial hardship is clearly evident and where it can be shown that a reasonable attempt is being made to make repayments, creditors will generally accept a DMP.

Unfortunately, this will not happen over night. Creditors will normally mobilise their payment recovery teams very quickly, once they think you are experiencing financial difficulties.

The sooner you appoint someone to represent your financial interest and the sooner you make repayments to your creditors through your plan the better, as it will reduce the time your creditors are left uninformed.

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Can I cancel my DMP?

In most circumstances, you can cancel your DMP without any bother by simply stopping the payments to it.

That said, many commercial DMP companies will be keen to avoid losing your business and some will go to great lengths to keep you onboard.

But you are not under any legal obligation to continue with a DMP if you want to maintain your debt for yourself.

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What is the legal position of a DMP?

A DMP is not a legally binding agreement and entering into a DMP does not replace your original contractual obligations relating to your debts.

It, therefore, cannot protect you from legal actions of your creditors and cannot force your creditors to accept its terms.

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What if I have payment problems during my DMP?

The flexibility of a DMP means that you don't have to seek creditor approval if your circumstances change for the worse, and you need to reduce your DMP payments.

That said, if you lose your ability to make payments all together, then the DMP becomes redundant as there's no funds to be distributed.

Creditors would normally increase the pressure being placed upon you if your payments were to stop altogether.

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Will a DMP affect my credit rating?

Entering into a DMP will have a profound affect on your credit rating for a minimum of 6 years.

As previously mentioned, due to the lack of legal protection given by a DMP, it is possible you will receive default notices and County Court Judgements against you.

Any missed payments, default notices or CCJs will be logged on your credit record and consequently your credit rating will be damaged.

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Will I need to open a new bank account?

If your bank account has an overdraft, or if you have any credit facilities with the bank providing your bank account, then you will need to open a new bank account.

If not, your bank could use its 'Right to set-off' the unpaid debts against any balance in your account, potentially leaving you with no money in your account to pay for your essential living costs.

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Which is best Charity DMP or Commercial DMP?

Charitable Debt Management Plans provide their service for free. This has the affect of ensuring all the monthly payment goes towards repayment of the debts.

This, in turn, means that a charity provided DMP will complete more quickly.

However, many people actually prefer to pay a commercial debt management company to help them, rather than using a charitable organisation.

They perceive the level of service as being significantly better when done by a professional company rather than a charity, although in our experience, this is not always the case.

Deciding which debt management organisation to use should not be rushed, even if you feel under pressure to find a solution but, ultimately, we think it should be a matter of personal choice.

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Get A Professional Opinion

Just as you would call a doctor if you were feeling unwell, so should you call a professional debt adviser if you have financial problems.

We take debt problems very seriously and there's not a debt problem too big or complex for us to handle.

To discuss your circumstances with a professional debt adviser please call 0800 088 7502 or complete this form and we'll call you at your preferred time.

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