What is a Debt Management Plan (DMP)?

A Debt Management Plan is an informal arrangement between a person in debt and their creditors.

The Debt Management Plan enables the person to reduce repayments to their debts to a more affordable level when financial difficulties arise.

Whilst this will inevitably increase the repayment term of the debt, it does offer respite from unaffordable debt repayments which will be of great value to those whose debt problem is short term.

Debt Management Plan objectives

Here are the main objectives of any Debt Management Plan.

  • To group all creditors together and make pro rata payments.
  • To make affordable payments on a regular basis.
  • To keep creditors informed and keep lines of communication open.
  • To get payments reduced and interest stopped.
  • To stop threatening letters and phone calls and halt any further legal action.
  • To extend the term of the debt but pay the debt off in full.

Debt Management Plans offer a structured approach to the repayment of debts that keeps payments at affordable levels whilst keeping creditors informed and, to some degree, payments maintained.

Different types of Debt Management Plan

Debt Management Plans can be administered in one of two ways.

'Do It Yourself' Debt Management Plan.

This is where you approach all your creditors directly, to explain why you are experiencing financial problems. You would provide the creditor with a financial statement, detailing your financial circumstances and the size of your proposed repayments.

In theory this sounds simple but in truth it isn't.

Liaising with creditors can be time consuming, frustrating and stressful, becoming more difficult as the number of creditors increase. Keeping lines of communication open with creditors whilst constantly being put under pressure to increase your repayments can be very challenging.

Most people faced with debt problems prefer not to have to endure phone calls from creditors. However, there are some advantages to the DIY method.

For example, a creditor will always prefer to speak to you rather than a third party. Also, payments to creditors are paid directly, with no third party management fees, maximising the amount received by creditors and reducing the time taken to pay the debt off in full.

3rd party Debt Management Plan

An alternative approach is to employ the services of a debt management company to administer a plan on your behalf.

They will asses your financial circumstances and approach your creditors with pro rata payments.

Being a commercial service there will be a charge which varies from company to company. Most debt management companies levy a set-up fee equal to your first 2 plan payments, then a monthly management fees typically between 15% - 20% of each monthly payment for the duration of the plan.

The advantage of employing a third party to manage your debt is that it removes the need for you to communicate with your creditors. Instead, the debt management company liaise with your creditors on your behalf.

Debt management downsides

When administered correctly, Debt Management Plans can be extremely helpful in dealing with a debt problem, however, it is important to be aware of the potential pitfalls.

Creditors are not obliged to accept the repayments being offered through the Debt Management Plan. They are within their rights, if they wish, to take recovery action for the outstanding debt which could, in the extreme, lead to bankruptcy. This can have a significant impact on you if you are a homeowner.

Furthermore, there are no guarantees that creditors will freeze interest and stop making late payment charges just because you have requested through the Debt Management Plan. So, don't be duped by companies offering false promises and guarantees.

Explore the alternatives

We continually stress that it is very important to look at all alternatives when facing financial difficulties.

For lower debt levels or for short term cash-flow problems, Debt Management Plans generally offer the best solution.

But personal circumstances should always be taken into account, in each individual case, to make sure of an informed decision.

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