If you find yourself struggling with debt there are often a variety of ways that you can manage the payments. The most common ways include an IVA (Individual Voluntary Arrangement), a Debt Relief Order (DRO) or a Debt Management Plan (DMP).
Debt management plans are flexible and won’t necessarily have an end date. An IVA will have both. Also, an IVA will need the majority of your creditors to agree. A DMP won’t. To qualify for a DRO you will need to meet the eligibility criteria.
What is a debt management plan?
A debt management plan is an arrangement between you and your creditors. It’s an informal agreement that consolidates your non-priority debts into, often, one monthly payment amount that’s more manageable.
You can arrange this directly with creditors or use a debt management company who, in some cases for a fee, will arrange a single payment to be spread among your creditors to repay the debts.
Not all debts will be eligible for inclusion for example high court fines or mortgage arrears can’t be included, but unsecured debts such as certain loan types (not student loans as one example), credit cards and store cards are eligible.
Debt management and your credit rating
While a debt management plan does in many cases freeze interest payments, it’s not guaranteed and creditors are under no obligation to stop interest.
A creditor will also class a DMP as a default as technically you won’t be paying the agreed repayment amount when you took out the credit.
So, if you have six creditors in your DMP you will have six defaults registered against your credit file. This will have an impact on your rating and ability to get credit in the future.
What debt can’t be included?
A debt management plan can be a solution to certain debts, but as mentioned earlier, not all debt can be included. Debt management plans are a good solution when it comes to unsecured loans, that is loans that aren’t secured against your home, but the following debts can’t be included, so will still be subject to full repayment amounts should you take out a DMP.
- Arrears on mortgage payments
- Fines at Magistrates’ or High Courts
- Student Loans
- Arrears for Child Maintenance payments
- Social fund or crisis loans
- Arrears in personal injury claims
This list isn’t exhaustive but gives you an idea that if, for example, you’re behind with your mortgage a Debt Management Plan won’t be available to you for that part of your debt.
Should you get a debt management plan?
Your financial situation is unique and a DMP may or may not be the right solution for your circumstances. Naturally, there are advantages and disadvantages to a DMP. Let’s look at some here.
The advantages of a DMP
- A more affordable monthly payment based on your income, rather than based on the original repayment terms of any credit
- A single monthly payment for unsecured debt (mortgage and certain other debts won’t be factored into a DMP), rather than lots of separate payments.
- Your creditors are treated equally so any demand letters should come to an end
- If you choose to take out a DMP through an intermediary company they will deal with creditors on your behalf
- Flexibility. A DMP is an informal arrangement so it’s not legally binding like bankruptcy and can be changed to reflect your financial circumstances. It has also no fixed end point (unlike an IVA which is often taken out for a period of 5 years).
The disadvantages of a DMP
- Any freezing of interest charges is at the discretion of the creditor so the amount you owe might remain the same despite taking out a DMP
- Paying a more affordable lower amount each month might result in the debt being in place for longer than the original credit terms
- As it’s informal your creditors can still ask you to make a repayment in full at another time or seek legal action to recover the debt – unless the agreement states otherwise
- Intermediary companies might charge a fee for administering your plan
- It can affect your credit ratings as a DMP might be recorded on your credit file
- All creditors must agree to the DMP. A creditor that doesn’t agree can still take legal action If you and a partner are joint borrowers and are both struggling with your debts, you should consider seeking advice on a joint DMP.
- If the debt is in joint names the creditors might still chase the other debtor for full repayment, even if one party seeks a DMP.
If you want to apply for a DMP you can approach the creditors directly or seek an intermediary to help you. You will need to share your income and expenditure with any creditors or management agency so that an affordable figure can be worked out.
If you choose a management agency then make sure they are regulated by the Financial Conduct Authority (FCA). You should also be fully aware of any implications and the terms of an agreement – for example if interest will be frozen.