Debt Management Plans (DMPs)
A debt management plan, or DMP, is an informal agreement between you and your creditors aimed at consolidating any unsecured, non-priority debts you have into a single monthly payment plan.
We’ll go through the ins and outs of debt management plans so that you can decide for yourself whether or not setting one up is a good idea given your particular situation.
What is a debt management plan and how does it work?
A debt management plan is essentially a debt consolidation program that works by combing payments towards any non-priority debts into one, manageable monthly payment.
It can either be set up by yourself or by means of a debt management firm. If you do go through a debt management firm you will be charged a fee, the value of which will vary from firm to firm.
Your monthly income and outgoings are assessed and after your priority and secured debt payments are accounted for, a payment plan is worked out based on what you can afford with your remaining capital.
Once this has all been calculated, a proposal will be made, accompanied by any relevant financial documentation, offering to pay a single, fixed sum each month to be distributed accordingly among your creditors.
Importantly, unlike an Individual Voluntary Arrangement (IVA), a DMP is not legally binding. This means that your creditors are not actually obliged to accept the terms of your DMP, though doing so is often in their interest if the alternative is you defaulting on your debts and having them ultimately written off.
Priority and Non-Priority Debts
Debt management plans only apply to unsecured, non-priority debts.
These include things like personal loans, store cards, credit cards and overdraft payments.
Secured debts include things like mortgages, whereby your house is put up as security.
Priority debts include secured debts like mortgages as well as:
- Council tax bills,
- Utility bills and TV license fees,
- VAT and income tax payments, and
- Court fines.
Debt Management Plans and Credit Ratings
Your credit rating is like your financial footprint; it is a record of all of your past dealings with credit and loans. Regular repayments will maintain and improve your credit score and late payments or insolvency will worsen it.
Having a good credit score is important if you want to take out any kind of loan or credit product in the future.
As with any other kind of debt solution or any form of insolvency, a DMP will generally adversely affect your credit rating. This is not always the case though.
Many lenders will, if they agree to the terms of your DMP, require a record of it to be placed on your credit file essentially as a warning to any other potential creditors.
Having your DMP recorded on your credit file at the start of the arrangement can actually be beneficial in the long run. If the plan is completed successfully then you will have an official record of your ability to recover from any debt problems you’ve had and it shows a willingness to reliably improve your financial situation.
Is a debt management plan right for me?
If you’re struggling to keep up with payments of unsecured, non-priority debts then a debt management plan can be helpful. If you’re unsure about exactly what you could afford to pay back then a debt management firm will be able to help you work out the best plan for you.
If a DMP doesn’t seem appropriate, or if the relevant creditors don’t accept your proposed terms, then you might want to consider a form of insolvency like an Individual Voluntary Arrangement to recover from a growing mountain of unsecured debt.
If you do feel that a debt management plan is the appropriate solution to your problems, then head over to our DMP application page and fill in the short form. We’ll put you in touch with our trusted partners so that you can start your journey out of debt as soon and as simply as possible.