A debt management plan (DMP) is a way of making your debts more affordable. Instead of making a series of monthly repayments to different creditors, a single payment is made instead. It's similar to consolidating debt with a loan, but no new loan agreement ever takes place. Those who have missed or made late payments on loans and credit card debt have little to lose in terms of a bad credit rating.
What Is a UK Debt Management Plan?
The debtor agrees to pay a minimum of £100 per month to an intermediary (a debt management company or charity). They will take their fee which is usually about 10% and the remainder will be paid to creditors on a pro rata basis. Unlike an Individual Voluntary Arrangement (IVA), this is only a voluntary agreement and is not legally binding on creditors.
Preparing a Debt Relief Program to Pay Off Debt
Put together a personal budget statement documenting all sources of income and expenditure. Include a full list of all creditors, their addresses, account numbers and how much is owed to each of them. This allows the representative to determine affordability based on how much disposable income is available.
The debtor will be sent an agreement to sign which allows the intermediary to offer representation. This will document all that was discussed over the phone, including a full breakdown of income and expenditure. It will also state how much can be offered to creditors.
Forms from all affected parties will be returned to the intermediary. Provided that the terms are agreeable to all affected parties, the debt solution is now in place and will be collected via direct debit on a monthly basis.
Advantages of a Debt Management Plan
- It will no longer be necessary to deal directly with creditors; all queries can now be directed to the intermediary.
- It may be possible to stop any charges and freeze interest. This saves thousands of pounds, especially on agreements where interest payments are very high.
- As would be the case with a consolidation loan, just the one monthly payment is now made.
- It can cut monthly outgoings significantly, helping to free-up money for rent or mortgage payments.
Disadvantages of a Debt Management Plan
- The intermediary will usually take the first payment as their fee and a further 10% of all future payments. This means that if £100 is contributed to the agreement, only £90 will be used to reduce debt.
- Interest on debt isn't always frozen as some creditors won't agree to it.
- The repayment period can be very long, especially if a lot of money is owed.
- It is only a voluntary arrangement and is not binding upon either party.
- A minimum of 3 creditors is normally required.
Tackling Unsecured Debt Problems with a Debt Relief program
A UK debt management plan is an ideal solution for people with modest personal debt problems. Those with serious debts over £15,000 may wish to consider an Individual Voluntary Arrangement or declaring personal bankruptcy. Consult a qualified debt counsellor before proceeding with a debt free solution.
Sources:
- "Free debt management plans." Payplan.
Asa Ghaffar - Asa has over 10 years of practical experience in loan approval, secured lending, bad credit repair, stock trading and debt management.
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