Is a debt management plan the right solution for me?
Debt management plans (DMPs) are a great way to manage multiple debts if you’re struggling to meet your contractual payments, but they may not be the best option for everyone. Read on to find out if a DMP is the right step for you.
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What is a debt management plan?
A debt management plan (DMP) is an agreement with a debt management company and your creditors, which allows you to repay your debts at a more affordable rate by making reduced monthly payments. A DMP will put all of your debts into one regular payment plan, making, it easier to keep up with making your regular payments.
It’s that simple, but there is one condition you’ll need to agree with - keep your DMC updated with any change to your circumstances, which includes income or outgoing changes or anything that will affect your ability to make your payments.
Your DMP is regularly reviewed to ensure your payments are affordable, and if things become a little tight, you have flexibility to amend the payment amount throughout your plan to avoid missed or late payments to your creditors.
Why is debt management important?
It’s important to demonstrate you can manage your debts, so lenders know you’ll be able to repay your borrowed credit. Being able to make your agreed payments on time also improves your chances of being approved for further credit at a better rate.
If you have multiple debts, it can be hard to keep on top of your payments, especially if you’re suddenly faced with financial hardship. In times like this, it’s worth considering debt management companies (DMC) like PayPlan and StepChange, they can offer free financial debt advice and the option of a debt management plan.
Is a debt management plan suitable for me?
Debt management plans aren’t suitable for everyone. They’re ideal for people with multiple debts who are struggling to meet their monthly payments or facing short-term hardship but will be able to start paying again in a few months’ time.
It’s important to know the benefits and risk of entering into a debt management, so we’ve compiled a list of points to consider before deciding if a debt management plan is right for you:
Benefits
- You pay what you can afford
- It's less hassle, you make one monthly payment
- You can add any arrears from household bills to your DMP
- The DMC will deal with your creditors
- Some don't charge a fee (PayPlan, StepChange)
- You have flexibility to alter your payments as a DMP isn't legally binding
- Your DMP will be reviewed regularly to ensure your're only paying what you can afford
Risks
- Creditors don’t have to enter into a DMP
- Mortgages and other 'secured' debts are not covered by a DMP
- It's not guaranteed your creditors will freeze interest or charges
- Creditors are still able to take court action against you, but this is unlikely
- Paying less than your monthly contracted amount can result a default notice being sent to you, which will stay on your credit file for 6 years
- Inflated DMP fees - there's a risk that higher fees may not provide you with a greater standard of guidance and account management as expected
- Debt mismanagement - you may find some DMCs provide a substandard service
What debts can be included in a debt management plan?
Non-priority debts are accepted in debt management plans, here are some examples:
• overdrafts
• personal loans
• bank or building society loans
• money borrowed from friends or family
• credit card, store card debts or payday loans
• catalogue, home credit or in-store credit debts.
Which debts cannot be included in a DMP?
You cannot include priority debts in a debt management plan, these include:
• Court fines
• TV Licence
• Council Tax
• Gas and electricity bills
• Child support and maintenance
• Income Tax, National Insurance and VAT
• Mortgage, rent and any loans secured against your home
• Hire purchase agreements
If you’re still not sure if a debt management plan is the best solution for you, StepChange have put together a short questionnaire to help you come to the right decision.
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Setting up a joint DMP
Can joint debts be included in my DMP?
If you have a joint debt with someone else, this can be included in your DMP. A joint debt means that you’re both equally liable for the full balance. If your joint debt is included in your DMP and the other joint account holder doesn’t have a DMP, the creditor may still chase them for the full balance.
If you and your partner are struggling with your debts, whether they’re joint or solely in one person’s names, you can set up a joint DMP and include all combined debts. Together, you’ll be responsible for contributing towards the monthly debt management payment. How you choose to share the monthly amount is entirely up to you.
This option would be ideal for couples that share household costs who want to work together to become debt free. They’re usually a preferred option for people who cohabit that are financially dependent on one another, there’s no requirement to be married for couples.
When working through your income and outgoings, both of your incomes would need to be included and your collective outgoings, both individual expenses and shared costs.
You do not need to be in a joint DMP as a couple, you can set up individual DMPs if you want to.
Debt management for self-employed
Can I enter a debt management plan if I’m self-employed?
The simple answer is yes - but depending on your situation it may not be the best option for you.
If you have business debts, a DMP may not be suitable as it’ll be harder to get creditors to accept lower payments, freeze interest and charges and agree not to take legal action. If, however, your business debts are up to date but you’re struggling with personal debts, a DMP could work for you.
Another factor to consider is whether your income fluctuates. If you don’t have a regular income, keeping up with regular payments in a debt management plan will be difficult.
Debt management plans (DMPs) and your credit file
How does a DMP affect my credit file?
If the payments you’re making to your creditors is less than your contractual monthly payments, a DMP will affect your credit file and score. Partial payments will be recorded on your credit file, and some creditors will add ‘DMP’ or ‘arrangement to pay’ markers for payments received through a debt management plans.
Any court action, defaults, or missed payments that may occur from making reduced payments will be recorded on your credit file for 6 years.
If a default has already been registered on your credit file, being in a debt management plan will have no bearing on your credit file.
Is a DMP the same as debt consolidation?
Debt management plans and debt consolidation loans are often confused and considered the same thing. It’s an easy mistake as both options combine your debts to provide one monthly payment. The key difference is debt consolidation requires you to take out additional credit to pay off your debts whereas payments for a debt management plan comes out of your own pocket.
If you’re considering a debt consolidation loan, it’s worth exploring both the benefits and disadvantages to ensure it’s the right solution or you.
Contact us
If you’re struggling with multiple debts and considering a debt management plan, let us know, we’ll put your account on hold for a short period of time to give you some time to contact a debt management company and talk through your options.
If you’ve already spoken with a debt management company and agreed it’s the right choice for you, we ask that you get in touch with us with the following details so we can update your account accordingly:
• Debt management company
• Debt management reference number
