If you are in debt and owe money to your creditors, there are various options available to you when it comes to paying the debt. The exact route you take to settle your outstanding debts will usually depend on your assets and the amount of spare money you have available. We understand that mounting debts can cause a significant amount of stress and worry, so we have compiled this useful guide to explain everything you need to know about debt management plans.
What Exactly Is a Debt Management Plan?
A debt management plan (DMP) will allow you to repay your debts in instalments. These arrangements will only be suitable for those with debts considered non-priority, such as credit cards, personal loans and overdrafts. However, if you can afford to repay your creditors a small amount each month, a licensed DMP provider will help you work out an affordable plan which will be put forward to your creditors.
A debt management plan will enable you to repay your debts in full, thanks to smaller and more manageable monthly instalments if your creditors agree to the plan which is put forward. Instead of managing several payments each month to a variety of creditors, you will make a single payment to the DMP provider, who will then split this payment between your various creditors.
It also means that your debt management provider will manage contact with your creditors, so it is unlikely your creditors will continue to chase you for outstanding payments. Although, with other debt solutions such as trust deeds and individual voluntary arrangements, the creditors are legally obligated not to contact their debtors.
The length of your DMP will depend on how much you can pay each month and the amount you owe to creditors. Those with a relatively small amount to repay and a higher disposable income will be able to complete their DMP quicker than an individual with large debts and a small disposable income. If you begin your debt management plan with a relatively low disposable income, it may be possible to reduce the length of the plan if your income increases during the arrangement, or you can reduce your monthly outgoings.
Although there are many benefits to debt management plans, it is important to understand that it may take longer to repay your outstanding debts, as you are likely to be making smaller payments each month. In addition, creditors could continue to charge interest and missed payment charges, so you may end up paying more in total over the duration of the agreement in comparison to the original debt amount. However, in reality, many creditors do agree to freeze fees and additional interest on your debt, although it is not guaranteed.
A debt management plan is a private arrangement, so the details are not kept on any public register. However, for formal arrangements such as bankruptcy, the details are recorded on a public insolvency register, which is available to anyone to view. However, if your creditors decide to record your DMP on your credit file, this will be viewable by anyone who completes a credit check on you.
Will I Be Able to Arrange a Debt Management Plan?
You will only be eligible for a debt management plan if you have a disposable income, which will enable you to repay your debts in full within a reasonable amount of time. If you have significant debts and only a small amount of cash spare each month, your creditors may not agree to the plan which your DMP provider puts forward.
Unsecured, non-priority debts can be included in a debt management plan. This includes debts such as overdrafts, personal loans, payday loans, catalogue debts, store cards, credit cards and even money owed to friends and family.
However, priority debts such as unpaid council tax bills, court fines, TV licence arrears, child support, mortgage payments, rent, gas bills and electricity bills will not be eligible for inclusion in your DMP. These debts are considered priority debts because there are more serious consequences if these debts are unpaid compared to non-priority debts.
If you are self-employed and have personal debts linked to your business, such as overdrafts and credit cards that have been used to pay business expenses, they may be included in your DMP. However, any outstanding VAT payments or tax arrears cannot be included in a debt management plan.
If you have outstanding non-priority debts, which are joint debts with another individual, you will be able to include these in your debt management plan. However, the creditor may continue to chase the joint account holder for payment. You are both equally liable for repayment of the debt, which is known as joint and several liability.
It may be possible to arrange a joint debt management plan if you are both struggling to repay outstanding debts. It is possible to include all joint debts in addition to your separate debts. This would mean that you would be equally responsible for making the debt management plan payment, regardless of your income or debt amounts.
It is advisable to split your disposable income between your priority debt payments and your DMP. Then, once the priority debts have been paid in full, the extra disposable income you have available can be added to your DMP payment. This will enable your DMP provider to increase the amount paid each month to your creditors, and your non-priority debts will be repaid in a shorter period of time.
Those who can afford to consistently make smaller payments on the debt over a longer period of time are likely to benefit from a debt management plan. They are also a great option for those who know their financial situation is likely to improve, especially if income levels are stable.
How Do DMP Providers Calculate Payments?
The debt management plan provider will need to see your average monthly expenses, which will be used to calculate your disposable income. Your expenses will include priority household bills such as rent, mortgage payments and utility bills, in addition to essential living expenses. It is also common for budgets to include a section for sundries and emergencies designed to ensure you have enough cash left to cover expenses such as Christmas and birthdays.
Before the plan can be proposed to your creditors, the debt management provider will need to calculate your budget accurately. The calculations will show your disposable income each month, which will be used as the basis for your proposed DMP payment. The aim isn’t to leave you financially struggling. Instead, the goal is to enable you to comfortably repay your debts while also maintaining a reasonable standard of living.
This means you will need to provide payslips, copies of bills and any other relevant documents to your income and expenses. Your DMP proposal will then be shown to your creditors, who will decide whether or not they agree with your proposed monthly payments. If your creditors are not willing to accept the agreement, a debt adviser will be able to investigate alternative solutions, such as individual voluntary arrangements, trust deeds, bankruptcy or sequestration.
For those who are employed, it is relatively straightforward to enter into a DMP. However, for self-employed individuals, there are some additional calculations. In general, if you are self-employed, you will need to calculate your personal income, which must be based on the average income and costs of the business.
In practice, most creditors will be willing to accept proposed payment plans, as this shows that you are committed to repaying your debt. It also means that your creditor may avoid the potential costs involved in chasing you for outstanding payments.
However, it is worth noting that a DMP is an informal agreement, so your creditors are under no legal obligation to agree to your proposed DMP arrangement. This means that not all of your eligible debts are guaranteed to be included in your DMP, and if you propose any future changes to the arrangement, they may not be accepted. Although, if the proposed changes mean that your repayment amounts will increase due to increased earnings, a reduction in expenses or an unexpected windfall, it may even be possible to settle debts early.
What Happens If I Default on My Debt Management Plan Payments?
It would be best if you always aimed to make your DMP payment each month. Nonetheless, unexpected financial emergencies do arise. For example, if you miss a single payment, your DMP will need to be extended to make up for the missed payment, but your creditors could decide to cancel the agreement. Although it is unlikely that the creditors will pull out of an agreement after a single missed payment if several payments are missed, there is a significant risk that the DMP will be cancelled.
If your outgoings have increased, which puts a regular strain on your ability to make your DMP payment, the DMP provider will review your budget and aim to reach a new agreement with your creditors. However, creditors are under no obligation to accept a new arrangement, especially if they feel that you are not committed to repaying your debts.
Will Creditors Still Contact Me If I Have a Debt Management Plan in Place?
Your creditor will not need to contact you in most situations once a debt management plan is in place. When the debt management plan is agreed upon, your creditors will be asked not to contact you. However, there will be nothing to stop them from continuing with recovery proceedings as it is an informal agreement. However, if you stick to the agreement and the creditors receive a payment each month, it is unlikely any further action will be taken against you.
Pursuing any form of court action against you is expensive, with the creditor still having no guarantee that the debt will ever be repaid. It is also worth mentioning that in England, Northern Ireland and Wales, your creditor will only be able to apply to the court for bankruptcy if you owe them more than £5,000, although, in Scotland, this amount is reduced to £3,000. This means that for small amounts, it is unlikely you will face bankruptcy action; however, the creditor may apply to the court for a County Court Judgment (CCJ).
If a creditor does contact you with a formal demand or court proceedings letter, you should update your debt management plan provider, who will be able to offer advice.
How Will a DMP Impact My Credit Score?
Your credit report will contain details of all credit agreements, the payments you have made, missed payments and the balances of each account. Whenever you apply for credit, the creditor will use the details in your credit report to decide whether you are likely to make your payments.
There are three credit reference agencies in the UK that hold credit reports, with each containing details such as your bank accounts, previous credit commitments and people you are financially linked with. The report will also contain information about credit searches performed whenever you apply for credit and are known as hard searches.
Some creditors may add a note to your credit report record to state that a payment arrangement is in place, otherwise known as a DMP flag. Once a DMP is in place, the payment you are making towards this debt is likely lower than the original amount required, so there will be a negative impact on your credit score.
However, it is worth noting that having an arrangement in place to repay your debts at a slower pace will be viewed as better financial management than leaving debts unpaid. When the DMP is complete, your outstanding accounts will be marked on your credit file as satisfied, which will show that you have been able to stick to an agreement and effectively manage your budget for a sustained period of time. Without a debt management plan in place, if debts were left unpaid, your credit score would likely have been much lower than if you arrange and complete a DMP.
Obtaining credit while a debt management plan is in place can be difficult, so loans, credit cards and mortgages may be temporarily unavailable, even if they are advertised as no credit check loans because, of course, there is no such thing in the UK. However, once you have completed the plan and your debts are settled, your credit score will gradually recover.
How Do I Find a Debt Management Plan Provider?
There are a variety of debt advice organisations that can arrange debt management plans for free, in addition to specialist providers which charge a fee. Debt advisers provide hundreds of people each year with specialist advice, so they will understand the situation you are in and will be able to advise whether a debt management plan is the right option for you.
A debt adviser will treat the information you provide with confidence, and your situation will never be judged. Instead, the adviser will provide an impartial service to help you find better ways to manage your finances, suggest ways to repay your debts, and even check whether you claim the full amount of benefits and entitlements available.
It is always advisable to choose a DMP provider which is regulated by The Financial Conduct Authority (FCA). This will ensure you benefit from a fair, transparent and trustworthy service, which means you will have a complete understanding of the risks involved and the potential fees you will need to pay. In addition, an authorised provider will also review your debt management plan annually, which means it may be possible to adjust the agreement to suit your developing financial situation.
If you already have a DMP arranged with another provider, you are under no legal obligation to continue with the agreement. If you would like to switch to a new agreement, you will need to contact your current provider to cancel the plan. They will then inform the various creditors involved that the agreement is no longer in place.
If you plan on switching to a new DMP provider, we recommend this is completed as soon as possible, as your creditors may start proceedings to recover the debt as soon as the initial arrangement is cancelled. However, it is important to remember that when you cancel an initial DMP, there will be no guarantee that your creditors will accept a new proposal from your new DMP provider. They may be less willing to agree if they feel as if there is an increased risk of you not sticking to the proposed arrangement.
If you feel as if your debts are mounting and spiralling out of control, a debt management plan could help you repay what you owe with affordable, manageable payments. There are other forms of debt management arrangements that are legally binding, such as trust deeds and individual voluntary arrangements. To find out more about the best options available to you, try Step Change or The Money Advice Service, both of whom are available online or contactable by phone.