Debt Management Plan
A debt management plan is an informal arrangement with your creditors which allows you to repay debts at an affordable level
A Debt Management Plan (DMP) is a useful solution if you are struggling with unsecured and non-priority debts. If you are unable to afford the repayments on your debts, you can set up a payment plan based on what you can realistically pay each month. This is an agreement that is negotiated with your creditors by a third party but, unlike other debt management solutions, it is not a legally binding agreement. As such, it is an informal debt solution rather than a formal one, such as bankruptcy or an IVA.
The aim of a Debt Management Plan is to reduce your monthly payments and make them affordable. The third party company will negotiate with your creditors and agree a reduced monthly payment with them, based on your income and expenditure. As the monthly payments are reduced, the payment term is usually extended and you will still have to pay the full amount that you owe.
Once you enter into a Debt Management Plan, you will make a single affordable repayment to your Debt Management company. They will then pay your creditors on your behalf. Creditors will be paid on a pro-rata basis, meaning that the creditors you owe the most money to will receive the largest share of the payment.
A Debt Management Plan can be a very effective debt solution, but it is important to understand the process and consider the alternatives before making a decision.
What is the Debt Management Plan process?
Debt Management Plans are simple to set up compared with other debt solution options, but you should get some advice to see whether other alternatives may be better.
If you do decide it is right for you, the first thing you need to do is find a Debt Management provider to negotiate with creditors on your behalf. You are able to negotiate a Debt Management Plan on your own, but using a professional company will take away the stress of having to deal with creditors directly. There are many third party companies that will negotiate a DMP for you, and there are also some debt charities that offer the service.
Your Debt Management company will start by assessing your finances to work out what you can afford to pay each month. You will provide them with payslips, bills and any other relevant documents so they can build a full picture of your expenses and income.
Your disposable income is defined as how much you can afford to pay your unsecured creditors once you’ve met your living expenses and essential financial commitments.
Working out a budget and how much you can afford to pay your creditors is the first step to setting up a Debt Management Plan
By adding up your total essential monthly costs and then taking this figure away from your income, they can see your disposable income (the remainder that you can afford to spend). This is the amount that you can realistically afford to pay to your creditors each month.
This figure will be offered to your creditors as a monthly payment. At this stage, your Debt Management company can also ask creditors to freeze or reduce interest payments, which they will agree to, in some cases. The creditors now have a chance to accept or decline the offer. If they decline your offer, you might need to consider other options like bankruptcy or an IVA instead.
If they agree to the new repayment plan, you can start making monthly payments to the Debt Management company and they will distribute them amongst creditors on a pro-rata basis.
As long as your financial situation remains the same and you continue making payments on time each month, the Debt Management Plan will stay in place until you have cleared the debts. The repayment plan is flexible so the monthly payments can change if your situation changes. If your income is reduced, you may be able to negotiate a lower payment that is more manageable for you.
This is not a legally binding debt solution, so it can be cancelled at any time. You may decide to do this if you receive a lump sum (from an inheritance, for example) and you are able to clear the debts right away.
How long does it take to set up a Debt Management Plan?
One of the biggest benefits of a Debt Management Plan is that it is quick to set up and implement. Once you have assessed your finances and determined how much you can afford to pay, you can start making those monthly payments immediately.
Your creditors do need time to review the proposal and decide whether they agree to it or not. If they contact you after you have signed an agreement, you can inform them that you are already on a Debt Management Plan and you are paying the amount outlined in the proposal you have sent them. They are still able to decline the proposal, even after you start paying, and you will continue to owe them the same monthly payments as before. They should however, accept the pro-rata payment from the Debt Management company but it may be the case that their collection activity will continue.
The individual or company managing your plan must be licensed and regulated the Financial Conduct Authority (FCA) (or have interim permissions).
What debts can be included in a Debt Management Plan?
The majority of non-priority debts can be included in a DMP. A non-priority debt means that the consequences of failing to pay the debt are less severe. Council tax arrears, for example, are considered a priority debt because you can potentially go to jail for failure to pay. Your mortgage is also a priority debt because you can lose your home if you don’t make payments. Credit card debts, on the other hand, are non-priority debts because the consequences of not paying are less serious.
Debts that can be included in your DMP include:
- Personal loans
- Payday loans
- Bank overdrafts
- Bank/building society loans
- Money owed to friends or family
- Credit card debt
- Store cards
- Catalogue debt
There are, however, debts that cannot be included in a DMP because they are considered priority debts. These are:
- Income tax
- Council tax
- National Insurance
- TV Licence
- Court fines
- Gas and electric bills
- Child maintenance/support debt
- Mortgage debt
- Hire purchase agreements (unless repossessed)
If you are struggling with any of these debts, a Debt Management Plan may not be the right solution for you and you may have to explore other options to help you regain control of your finances. However, if your non-priority debts are covered by the DMP, then it may create the room in your budget you need to make the priority debts affordable.
The Advantages of a Debt Management Plan
A fair and open way of sharing payments, widely understood by creditors.
Offers are more likely to be accepted and interest frozen than if you try to do this yourself.
The DMC helps you prepare your plan, which is used to put your case to the creditors.
You make a single regular payment to the DMC, which administers all payments to your creditors. All payment should be passed on within 5 working days. The single monthly payments are far more manageable than multiple payments to creditors, so it is easier to create a budget and stick to it.
Debt Management Plans are flexible. If your financial situation changes and you are unable to afford the monthly payments, it is easy to amend or cancel the agreement as it is not legally binding. This also gives you the option of paying off the debt earlier if you have the means.
Some debt management companies do not charge you a fee.
The Disadvantages of a Debt Management Plan
In a debt management plan, debts are repaid in full – however long this may take.
This is in contrast to formal statutory debt solutions such as a IVA or Bankruptcy where some debt is legally written off.
However, creditors may write off what you owe after a period of time if you have shown you’ve made every effort to repay them as much as you can; and you’ve not missed any payments
Entering into a DMP means contractual payments are missed and your debt and repayment term could increase.
Your credit rating will be impaired and it may be harder to obtain credit in the medium to long term as records are retained by credit reference agencies for six years.
The debt management company can’t force creditors to participate in a DMP nor freeze interest if they do choose to participate.
It is your responsibility to continue to make payments to creditors that are not/cannot be included in your plan.
Failure to pay any taxes, fines, child support payments and other certain debts could result in a loss of access to essential goods or services or repossession of, or eviction from, your home.
Even if you are keeping up with payments, creditors could still take enforcement action against you, for example court action to get a charging order on your property.
This is because you have broken the terms of your original credit agreement and creditors can seek to get a Court order to enforce or encourage payment.
Having a charging order on your home means that the debt becomes secured on the property and if you don’t repay the debt, the creditor has a claim on the proceeds if the property is sold.
While a plan can last for several years, some creditors may freeze interest for only part of this time – if at all.
As such, the total you repay could be more than the original debts, and could extend the lifetime of the plan.
- Your disposable income may fall below the level your debt management company will deal with
- Creditors may reject your reduced payments offer
If the arrangement fails and you do not make alternative arrangements to pay your creditors, there is a risk of bankruptcy if your debts are large enough.
Before deciding whether a Debt Management Plan is right for you, weigh up the advantages and disadvantages and look into your other options too.
Consider All Of Your Options
If you’re struggling with your finances and you want to discuss alternative financial solutions please complete the form below and we will be in contact
Swift do not currently offer debt management plans. However we can assess your situation and explain all other options.
Frequently Asked Questions
-
Can I Get A Mortgage With A Debt Management Plan?
You are able to apply for a new mortgage or remortgage an existing property whilst you are on a Debt Management Plan. Unlike other debt solutions, there are no limits on borrowing in place, so you can apply.
A Debt Management Plan negatively affects your credit score, so the interest rates you will be offered are likely to be less favourable as a result.
-
Does A Debt Management Plan Stop Bailiffs?
A Debt Management Plan does not give you legal protection from bailiffs. If they choose, creditors may still send them to collect on the debt. However, if you have agreed a payment plan with your creditors and you are making your payments every month, it is unlikely that they would do so.
-
Are Debt Management Plans Legally Binding?
No, a Debt Management Plan is not a legally binding debt solution. This means that you and your creditors are both free to change or cancel it at any time.
-
Is An Iva Better Than A Debt Management Plan?
The best debt solution depends on your specific situation. An IVA allows you to write off a portion of your debt, but it also puts more financial constraints on you. It will have a bigger impact on your credit score too. If your Debt Management Plan proposal is rejected, an IVA can be a good next step.
-
Can I Change From An Iva To A Debt Management Plan?
Yes, in some situations, you can change from an IVA to a Debt Management Plan. Usually, this is beneficial when your financial situation changes and you want to pay more towards your debts. But before you can change, you must terminate your IVA. Also, bear in mind that you are changing from a formal to an informal debt solution, so you lose the legal protection that you have against your creditors.
-
Not Clearing All Debts?
If you don’t clear all your existing borrowing, the new loan is likely to make your debt problems worse and make it more difficult for you to make all your payments.