What Is A Debt-management Plan
A Debt-Management Plan (DMP) is an informal agreement between you and your creditors that has been negotiated, usually by a third party, to lower the monthly payments being paid to your creditors. A DMP isn’t legally binding so your creditors may still charge interest and can continue to take legal action against you. With a DMP, your creditors will assess your financial situation and base your new payment on what you can reasonably afford. This is calculated by taking into account your monthly budget and then, usually, extending your payment period.
Criteria For A Debt-management Plan
There isn’t a set amount of debt needed to enter into a debt-management plan, but there are a few things that should be considered first.
A DMP is great for those struggling to keep up with debt repayments but who can afford to consistently pay smaller amounts each month over a longer period. Before entering into a DMP, always ensure that you will still be able to comfortably pay priority bills such as your mortgage/rent and council tax. It’s also great for those whose financial situation is likely to improve over time and those who have a reliable and steady income.
Is A Debt-management Plan Right For Me?
To decide whether a DMP is the right debt solution for you, it’s important to ensure that you consider both the positive and negative aspects.
Advantages of a Debt-Management Plan
- One affordable, monthly payment to your creditors.
- Debt management is an informal arrangement that avoids the need for insolvency procedures such as an IVA, DRO or Bankruptcy.
- A DMP agreement with your creditors may suspend any action against you such as County Court Judgements (CCJs).
- In many cases, creditors freeze interest or charges.
- Your monthly debt repayments may be reduced.
Disadvantages of a Debt-Management Plan
- Your creditors are not obliged to accept a DMP proposal. The arrangements are informal, which means that your creditors can change their minds at any time.
- Your credit rating may still be affected.
- Creditors do not have to freeze interest or charges.
- Your home and other assets are not protected from creditors.
- You will continue on your DMP until all of your debt is repaid, there is no debt forgiveness.
How Does A Debt-management Plan Work?
You will make one monthly, affordable payment to your DMP. This payment will be divided up and paid to your creditors. This division is worked out based upon what you owe to each creditor. So the creditor you owe the most money to will receive the largest amount from the monthly payment.
You will continue to make payments until your debt is cleared. Most creditors will freeze their interest and charges so that you can repay what you owe more quickly, but they are not obliged to do so.
Which Debts Can be Included in a DMP?
- Personal loans
- Bank or building-society loans
- Overdrafts
- Money borrowed from family and friends
- Catalogue, home-credit or in-store credit debts
- Credit cards, store-card debts or payday loans
Which Debts Can’t Be Included in a DMP?
- Mortgage, rent and any loans secured against your home
- Hire-purchase agreements if your purchase was essential
- Court fines
- Tv licence
- Council tax
- Gas and electricity bills
- Child support and maintenance
- Income tax, national insurance and VAT
Can I Apply For A Debt-consolidation Loan?
If you have a good credit rating, steady income and can commit to the long-term payments of a debt-consolidation loan, then you can apply for one. However, it is certainly best to seek professional advice before applying, as being refused a loan can negatively affect your credit score.
The process of applying for a debt-consolidation loan is simple (although each loan process will vary). Upon applying for the loan, you may need to provide proof of income, and your credit score will be checked. If you are approved, you will receive the loan and should use this to pay off your existing debt and close your accounts. You will then only have one creditor, which you will repay until your debt is entirely paid off, leaving you debt-free.