Debt Management Plan

What is a Debt Management Plan?

A Debt Management Plan (DMP) is an informal debt solution. If you are struggling with your debts, a DMP involves you negotiating with your creditors to reduce your monthly payments on your non-priority debts.

You carefully calculate how much you can afford and present this to your creditors. It will take longer to repay your full debts, but you may be able to ask for your interest and charges to be frozen to limit the length of time it would take to fully repay your debts.

As an informal debt solution, your creditors are not legally bound by the agreement, even if you use a third party to negotiate. However, this also means they can be flexible if your situation changes, depending on your creditors’ agreement.

How does it work?

STEP ONE: Decide if you want to use a DMP provider
DMP providers can negotiate on your behalf. They often have more experience with creditors, and you could benefit from the respect they may have within the field. They may, however, charge a fee for this service.

STEP TWO: Calculate how much you can afford to pay
You need to provide information to your creditors about your essential costs and income. This could be done by giving your DMP provider some financial documentation, such as your pay slips, bills and bank statements, or you could do this yourself.
Don’t forget to include irregular costs, such as small financial emergencies and Christmas, and your priority debt payments, such as any mortgage arrears, tax arrears, or gas and electricity arrears. A DMP cannot include your priority debts, and serious consequences can occur as a result of not paying them.
Once you have calculated your income after tax, and your essential costs, you use this information to calculate your expendable income. The amount left over when you take your essential costs away from your income is what you can offer to your creditors.

STEP THREE: Send a proposal to your creditors
Your proposal should be as detailed as possible as your creditors are more likely to trust a thorough and well-though-through plan. Show them, clearly, how much you can offer them, and why, and how long it will take you to pay off your remaining debts with this monthly amount.
They can then choose to accept or reject this proposal. Don’t worry if they reject it, there are plenty of other debt solutions which you could explore if you need help managing debt.

The Benefits of a DMP:

• Your monthly payments are based on what you can actually afford
• Deciding to contact and deal with your creditors can help you to build a more trust worthy relationship with them. Creditors are more often used to people avoiding them
• A good relationship with your creditors allows your DMP to be more flexible if your circumstances change
• As an informal solution, your DMP will not appear on any public insolvency registers.

What are the risks?

• The more you lower your monthly payments, the longer it will take to pay off your debts because you are still liable for the full amount. Other formal, debt solutions work over a limited period of time. For example, an Individual Voluntary Arrangement (IVA) lasts 5 or 6 years, and, after this, the remainder of your debts are written off
• Your debt may continue to grow as your creditors are not guaranteed to freeze your interests and charges. Only formal debt solutions can guarantee your interests and fees are frozen
• As with most debt solutions, your credit rating may be negatively affected
• Your creditors are not obligated to agree or stick to the agreement, and can still contact you or take legal action against you. This is not the case with legal agreements

Who can get a DMP?

There are no strict eligibility criteria for DMPs. As long as you need debt help but also have a stable income with an expendable amount after you pay your necessities and priority debts, such as your mortgage, rent and council tax, then you may benefit from a DMP. Otherwise, there isn’t a minimum or maximum amount of debt.
A DMP is best for people with a serious debt problem, who are likely to be able to pay off the debts completely, even with reduced payments, in less than 4 or 6 years. Those who would take longer than that to repay their debts, may want to explore an IVA or Trust Deed, which allows you to have lower, affordable payments, but also involves your remaining debts being written off at the end of the time-sensitive arrangement.

It may also be of particular note for people with a lot of joint debt as it is possible to include joint debt into a DMP. However, the other person will continue to be liable for the full amount of the debt, rather than half, due to ‘joint and several liability’.

There is also an option to have a joint DMP, in which two people are equally responsible for the repayment plan, regardless of different levels of income or debt. This may be a good idea for two people who have a lot of joint debt together. However, it is important to note that whoever has the less debt could become liable for the full amount of the other person’s individual debts as well.

Alternative Solutions

DMPs are the best solution for certain circumstances. However, if you are looking for a formal solution, which your creditors are legally bound by, entering into a Trust Deed if you live in Scotland, or an IVA if you live in England, Wales, or Northern Ireland might be the right option for you. You might also consider a Debt Arrangement Scheme (DAS), which is similar to a DMP, but legally binding for creditors.